Market capitalization is the calculation of the value of a companies stock. It is calculated by multiplying the outstanding shares by the price of the stock. Small cap stocks are generally those stocks with a market capitalization of between 50 million and 500 million dollars. Small cap stock investment is considered a very worthwhile type of investment by many analysts. This is because the small cap companies are considered the type of companies which will be able to move on a moments notice and take advantage of growth opportunities when presented.

There are different studies which indicate that small cap stocks do outperform large cap stocks. However, this must be taken with a grain of salt. At times, large cap stocks do actually outperform small cap stocks. This generally happens when the stock market is coming out of a recession and investors are looking for value stocks. They are a bit worried about what the market is going to do, so they are looking for solid investments that pay dividends. Small cap stocks also do well in periods of high inflation.

While small cap stocks may be out of favor at certain times of the stock market cycle, they may actually be a good investment due to this under appreciation. Buying before others buy is the best time to get the stock cheap. I once heard that the best way to make money on your investments is to get there before anyone else does. This is known as the contrarian viewpoint.

One of the problems with small cap stock investment is the transaction costs. Because the stocks have a low value, the transactions costs will force the investment cost up. The spread between the bid-ask is one of the ways that the transaction costs are higher. Percentage wise, this spread causes the buyer to spend more than he would with a large cap stock. The illiquidity of the small cap stocks will also force the price higher. The volume percentage is simply not there for small cap stocks.

The way to combat this higher cost is to invest for a longer period of time. If you have a longer investment horizon, the cost is spread over that period of time and you are able to make money on your investment. You will also be able to obtain higher returns as the invested company re-invests their profits and obtains a larger growth pattern. In one study which was completed, it was determined that if you invested in small cap stocks and held the investment for at least five years, you definitely beat the large cap stocks.

Another strategy to make money with small cap stocks is to diversify. Small cap stocks tend to be concentrated in a smaller number of sectors. So you need to spread your investment over a larger quantity of stocks to reduce the amount of risk associated with the investment. Another strategy is to make sure you perform the proper amount of due diligence. If you were looking to purchase a company, you would spend the time to dig all through their financial records to determine if they were worth the investment. Why wouldn’t you do the same with your stock purchases?

In 2008 the S&P 500 did a nose dive. In 2009 it reversed itself. Since January, 2010 the S&P 500 has traded in a very small range and as of March, 2010 is at the same position it was in at the beginning of January, 2010. There are many different viewpoints of what the stock market is going to do during the remainder of 2010 and going forward. In order to make money in your investments during this and other volatile times it is important to establish a defensive position in your trading strategy. One of these strategies is to find dividend paying stocks that you can buy that will help you to make money while possibly experiencing a potential roller coaster ride. In this way, you will continue to make money with your investments.

In developing an investment strategy, you want to be able to beat the return you would have gotten if you have put your money in the Treasury Fund. This is because you are taking on more risk with an investment in the stock market so you should be rewarded for it. However, with any stock market investment you should always be thinking of long term rewards. If you will need the money in a very short term, you should not be investing in the stock market. Because you will want to make more money than the Treasury Fund, you should look for dividend paying stocks that have a higher dividend yield than what you can get in that fund.

You should look at more than the dividend yield. If you were only going to look at the dividend yield, then it would be a simple matter of using a filtering screen to find the highest paying dividend stocks and put your money in those stocks. However, just because a company has recently paid out high dividends does not mean they will continue to pay these high dividends. They may choose to discontinue the paying of dividends or to reduce them.

In evaluating dividend paying companies, you should look at a few other items. The first one to look at is their balance sheet. This is a statement as of a period of time that shows what their assets and liabilities are. If the company has high liabilities and is losing cash for whatever reason, it is a good idea to stay away from them. They will probably need to reduce their dividends at some time due to a problem with cash flow. The stock price will drop in anticipation of this action. In relation to this, you should review their cash flow statement and determine where their cash is coming from. The second thing you should look at is the income statement. This will show how profitable they are. If their trend is a downward trend in their revenue and profits, this will probably translate into a reduction of cash at some time. Look for stable companies with sustaining profits and a good cash flow.

You should also look for a long term history of these dividends. A company who has developed a reputation for being a high dividend paying company will often do all they can to continue paying these dividends. They do not want to hurt their reputation. So look for companies with a history and not just some company that has begun recently to pay out dividends.

A good diversification policy is also a good idea. Be willing to invest in several different companies or even in a fund that specializes in dividend paying companies. In this way, you will be able to obtain the best of two worlds. You will have your money spread over several different funds and have the rewards of obtaining dividends.

Of course what you will need to realize that investing in dividend paying stocks is not a get rich quick method. It will take some time to grow your investment. However, what you will do with this method is to continue to beat the return you would have gotten with a low risk investment in the treasury bonds or with a money market investment. You will also be able to beat the unseen risk known as inflation. Too often, people do not consider this risk. However, it is a real risk that each of us should be trying to beat.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Penny stocks, by definition are stocks which are trading below $5.00 per share and which have a market capitalization below $200 million. The market capitalization is arrived at by multiplying the price of the stock by the number of outstanding shares. There are many different opinions on whether or not you can make money with penny stocks. Almost every opinion however, states that if you are going to try to make money with penny stocks that you should be extremely cautious and only use money you can afford to lose.

When investing in large cap or even small cap stocks, you have a legitimate history of how the price of the stock has done over time. You can do a pretty good job of evaluating both the technical and fundamental analytics of the stock. With penny stocks the technical and fundamental analytics may not be readily available. Some times the company is nothing more than a start up company with a dream. They are promoting themselves as the next Microsoft as soon as they get a viable product. You should definitely stay away from any company without any legitimate sales.

When trying to make money with penny stocks you should never invest in companies not listed on a major exchange. That means that you stay away from the pink sheets or over-the-counter stocks. You should also stay away from those stocks that come recommended by e-mails or some other promotional method. These are prime targets for pump and dump schemes. The company should also have at least 10 million is sales. This would indicate that it is a legitimate company that is capable of making a profit.

Compare the price per share against the book value per share. Only buy companies that have a very low multiple on their cash value and limit your stock purchases to five percent of your portfolio. That way you will truly be investing with money you could possibly lose.

Another tip is to investigate the amount of debt the company is carrying. You should only invest if the debt to equity ratio is low. An investigation of what the insiders are doing is another tip to consider. If they are dumping the stock, then that is a red flag for you.

If you are going to try to make money with penny stocks, you will need to do a lot more homework than with any other kind of investment. You are going to need to watch the stock by the hour and be willing to dump it at the first sign of trouble. Some advocates even suggest that in trading penny stocks that you need to become a day trader. If you are unable to do this, then investing in penny stocks is probably not for you.

It is possible to make money with penny stocks but the risk is high and the returns are unstable. There are probably more safe investments to make. However, if you are a person who thrives on risk and want to give it a try, then go for it. However, be aware of the risks and by all means do your homework. Be picky and maybe only choose one of a hundred stocks that look interesting.

Give your ideas some legitimacy by tracking a potential investment and see how you would have done. Then after you have traded several different stocks and feel you have a good trading system, then you are probably ready to try it with real money. Be careful and start with a small amount of cash. The ride may be fun and you even may make some money by investing in penny stocks.

If you are interested in making money with your stock investments, another posting to look at is http://mystocktradingtips.com/strategies-and-tips-for-stock-market-investing/.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

I think the question of how to make money with stocks is on the mind of every investor. Stories of the person who was able to retire at an early age because of being able to pick the correct stocks are always available. This is kind of like the stories of the gambler who strikes it rich. The problem is that with every success story there are multiple stories about people who lost money. These stories are just not advertised by those who are trying to get you to buy into their stock tips.

Investing publications will often post on their cover sheets that they have the answers on stocks that are undiscovered and have unlimited potential for the investor that jumps in right now. If you have ever bought into this scenario, and I have, then you find the stock generally goes down immediately after you buy it. I have often thought I should just short sell all stocks that come via the latest and greatest stock tip. Except that is also a very risky step to take.

If you are trying to make the proverbial easy buck with your stock investments, then you will always be chasing the next golden goose and end up quitting by saying that it can not be done. That is usually true. In any endeavor, those who are not willing to put in the work do not make the money. If it was easy to make money, then we would all be living in upscale neighborhoods. However, if you are willing to put in a little work and be patient, there is a possibility of you being able to make money with stock investments.

Your investment research should be to look for companies that have a sustainable competitive advantage. They should have products that will enable them to continue to gain market share within their industry. They should also have the mindset that everyone they encounter within their circle of influence is a needed component of their business. This includes customers, employees and shareholders. They should also be strong enough to be able to weather the ups and downs of any trends in the economy. It is easy to make money when everything is going well but how strong are you when the economy turns down. There are many companies that are no longer around who were not able to make the transition when things turned.

Good strong management is also a needed commodity to make a company successful and thus have their stock price continue to climb. Those executives who are able to see into the future for the next ten years and are willing to make the correct decisions even if they seem out of sorts at the current time are the executives who drive successful companies. You need to find companies with this type of management team and it will not matter the industry they are in, they will find a way to make it work. Of course that is another thing that is needed. Industries that analysts do not consider in favor will not do well in the short term. If you invest in these industries, you need to be willing to wait for a while for the prices to go up. I am not saying they will not eventually go up but it may be a while.

That brings me to my last tip. Invest for the long-term. The stock market has historically done better than many other investments but it does go up and down. Do not invest money you need to have available in the short-term. Diversification of your investments is always a good stock trading strategy. Make sure your investments are trading in the most efficient money making way possible by enhancing your return while reducing your risk.

Another article I have written that talks about making money in the stock market can be found at http://mystocktradingtips.com/strategies-and-tips-for-stock-market-investing/. I would suggest you also review this article for ideas.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

The idea behind proper asset allocation is more than not putting your eggs in one basket. It is actually the process of developing an investment strategy that optimizes your investment to get the most return with the least risk.

Let’s say you have two stocks that you are looking at investing in. These stocks have very similar characteristics. In fact, their stock prices generally move together. If you chose to invest in a 50/50 scenario with these two stocks, you would not accomplish the best use of your money. You might as well have chosen just one of the stocks. Now let us say that when one of the stocks goes up, the other one goes down. Thus if you invested in a 50/50 scenario, in all cases half of your investment would be going up at all times. Covariance is the statistical term used to explain how stocks are correlated to one another. The smaller the covariance, the more they are unrelated.

Another statistical term to introduce is the standard deviation. This is a measurement of the amount of risk an investment has. Let us say that a stock has an average return over the past 10 years of 15 percent. Now let’s say that the stock has a 10 percent standard deviation. That would mean that there is a 65% chance that the stock will generate a return of 5% to 25% return. There is also a 95% chance the stock will generate a return of -5% to 35%.

Asset allocation theory states that you can add a second investment and get the potential return to a 18% return with a standard deviation of say 11%. You have increased your return without increasing your risk by that much. If you add two more assets to diversify your portfolio you can obtain a greater amount of return and possibly reduce your risk from investing in only one stock.

So the idea behind proper asset allocation is that you find the optimum asset classes to invest in. You should look for asset classes that are not related to each other. This can be done by using an asset allocation software. You would then find the best stocks within each asset class and also use the asset allocation calculator to determine how they are related to one another.

The optimum mix would be where the percentages of each stock purchased will maximize your return with the least amount of risk. You might invest in 10% of one stock and 20% of another stock. It depends on what the asset allocation software indicates you should do to create the best mix. In this way, you are able to create the greatest opportunity to make money with your investments. There are many different allocation software programs on the market. In another post, I will evaluate the software programs and indicate which one I feel you should purchase.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Some real estate investment advisors state that to make money in the real estate market, you should leverage your investment. This means to invest around 10% of your own money and borrow the rest. This expands the capacity you have to invest. The stock market has its own version of leverage. This is known as margin purchasing. Another term is buying stock on margin.

When you buy stock on margin, you are borrowing from the broker. The securities and exchange commission (SEC) and the Federal Government have set rules in relation to margin purchasing. They have stated that you cannot borrow more than 50% of what you actually have in your own investment. That is, if you wanted to purchase $1000 of stock but only had $500, you could borrow the rest. There would be an interest that you would need to pay on the borrowed funds.

There is also a tremendous risk associated with this borrowing. If the price of the stock goes up, you win. When it goes up to your exit point, you can sell the stock, pay off the loan and pocket the difference. The risk comes to play if the price of the stock goes down. You must maintain the 50% ratio. Thus if the value of the investment falls down from the 50% ratio, you are subject to what is known as margin calls. This means the broker requires more funds from you. If you have the funds available, you can cover the margin buy reducing the debt. If you do not have the funds available, you must sell enough of the stock to make up the funds required. Since the forced sell comes when the price of the stock is below your purchase price, you are forced into an investment loss. This can be very heartbreaking. You have the potential to lose a lot of money this way.

The difference between leveraging real estate and leveraging your stock market investments is that if the real estate market goes down, you only have to pay the interest payments and wait. With the stock market margins, you have your margin calls. It is a pretty scary way to go. I know because I have lost a lot of money by purchasing stock on margin. I will not go that way again.

If you choose to buy stock on margin, you need to realize the risks. Make sure you have done all the financial and technical analysis and that you can afford to cover the margin calls if there are any. I would not recommend this for the beginning investor.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Before you begin any journey, you need to determine where you are going and how you will get there. You also need to determine the vehicle you will use and how long it will take to get there. Getting to your determined financial destination is the same way. Before beginning this journey, you need to sit down and do some planning. Too many people think they want to invest in the stock market before deciding what they want to accomplish. They end up chasing various stock tips or ideas and getting nowhere. This is similar to just getting into a car and merely driving without a destination in mind. You may go somewhere but in the end, it may not be where you really wanted to go.

The first investment goal is to get out of debt. You may have high credit card debt that is costing you over 18% per year. Investing in a stock fund that pays 10% does not make sense in this situation. Also, you need to invest in a savings plan. You really need to have a financial cushion of 3 – 6 months of savings to cover unexpected expenses. You would hate to have to sell some stock to cover the purchase of an unexpected expense

You then need to determine your short term, medium term and long term goals. You should really have some idea of what you desire in each financial category. Pat Swanson, a Certified Financial Planner and families’ specialist with Iowa State University (ISU), states that “Individuals spend more time planning a summer vacation than they do setting investment goals”.

For example, a short term goal may be a family vacation for the next summer. This will probably require some savings but it should be put into a short term vehicle such as a 6 month certificate of deposit (CD). What I have done is set up three 3 month CD’s. I have one maturing every month. They are also the type I can continue to invest in. That way I can put money away every month and have one maturing each month in case I need the money. The interest rate is lower but it is okay for meeting short term goals.

Saving for a home or a major purchase may be a medium range goal. This may be 3 – 4 years in the future. This can be accomplished by longer range investments such as Bonds, or longer range CD’s. Once again, it is important to realize that if you have invested in the stock market, the stock market may be on a downward swing when you need the money. Therefore, a different vehicle is needed for this type of goal.

Long range goals such as retirement or saving for your children’s, grandchildren’s education are examples of long term goals depending on your age. If your expected retirement is only 5 to 6 years away, this may be considered a medium range goal. However, if it is further, you can consider investing in a higher risk, but expected higher return, investment tool such as the stock market.

You should write each of your goals down. Remember, a “goal not written is only a wish”. You should think about your goals often and visualize how you will feel when they are accomplished. This helps to make the goal real in your mind. You should also not establish conflicting goals. Make them reasonable. Also remember your goals should be Specific, Measurable, Attainable, Reviewed, and Time related (SMART).

A specific goal is one with dollar amounts and dates established for an identified purpose. Make regular deposits into your financial vehicle and be consistent. Reward yourself with some short term attainable goals. It feels good to have accomplished a goal and helps you have the realization that the longer term goals are possible.

If you decide to invest in the stock market, remember it will take some research. You probably invested a considerable amount of time to prepare for your career. Be willing to invest some time in your financial goal career. Do some research read up on different investments including the risk each one carries.

Also remember your investing goals will probably change over time so you should reassess them at least annually. Are you on track or has something changed to require updating your investment priorities. Perhaps a major event has happened that causes you to rethink what you need in life.

Have fun with your goals. This can be a fun time. It is exciting to have a dream and reach it. Remember that life is more than just reaching the final destination, it is having fun along the way.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Deciding on your investment time horizon or time line is a crucial step in determining your investment strategy. Your time horizon is the time from when you begin an investment strategy and when you need the money.  For example, if you were saving for a home and wanted to move in after 3 years, your time horizon would be 3 years.

Knowing your time horizon is crucial because you need to know how aggressive you can be with your investments. All things being equal, you can be more aggressive with a longer time horizon.  There are specific strategies and asset classes that make sense for each investor’s time horizon and that should guide you in the decisions you make.

Time diversification or remaining invested through several market cycles helps you to reduce the risk involved with investing.  Time diversification is especially useful with stock investments where in the short term, there may be both up and down swings.  Time diversification helps to smooth out those swings.

Because you can reduce some of the risks through time diversification, a longer investing time period allows you  to take on greater risks and thus benefit from a higher return on your investment.  With a shorter time period you will not be able to diversify over several market cycles, so you will need to settle for lower risk, lower return investments.

To make the most of time diversification it is important to remain invested over more than one market cycle.  A market cycle is a period of time of at least five years.  If you can invest in more than two or three market cycles, the opportunities open up.

For instance, with a time period of 2 – 3 years, you should probably invest in money market or certificate of deposits.  For a time period of 4 – 8 years, you can probably invest in government or corporate bonds or even some high value stocks which are known to consistently pay dividends.  For greater than 8 years you can probably invest more in small company or growth stocks.

If you are establishing a goal for retirement, you need to remember that with retirement goals, depending on your age, you are probably investing on an extensive time horizon.  However, with this goal, you need to realize that you really have two time horizons.  You have the time horizon which goes to your retirement age, but then there is the time horizon from retirement to death.  Many people are living into their ninety’s now, so you should really plan accordingly.  You should still plan on some aggressive investments even after your retirement.

Another thing to remember is that as time progresses, your time horizon shrinks for your goals.  A time horizon of 8 years after a period of 4 years now becomes a short term time horizon.  You will need to constantly evaluate your time horizons and plan accordingly.

Identifying your risk tolerance and time horizon helps to set your investment strategy.  Your strategy will help you decide how much of your portfolio is going to be invested in bonds, stocks, and stable value and money market funds.  This is known as asset allocation and is discussed in another lesson.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind.  The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials.  Trading of securities may not be suitable for all users of this information.