Should You Make the Stock Market Part of Your Portfolio? What the Stock Market Can Bring to Your Portfolio By Mo2

Definition
The stock market is truly an amazing invention. Essentially, by owning a stock you own a part of a company. Yes, even you my friend can own a part of Coca Cola! (Sorry, that’s what I’m drinking as I’m writing this article) A company issues its stock to the public hence losing some or all, depending on the structure, of the company in return gets funds so that the company can grow.

Although you are considered a shareholder and hence a partial owner of the company, you can’t just go into the company headquarters and kick the president out and start taking home all the equipment. However, you do get to take a share of the company’s profits through capital gain (rise in share price) or through dividends, if the company has one.

Dividends
Ah, the mighty dividend. Every company has a different philosophy for paying out dividends. At least that’s how I see it; otherwise it wouldn’t make sense for a company to be paying out more that they earn. Yes it does happen, in fact a lot of the companies do lose money too. Just because there’s a sweet dividend attached to a stock does NOT make it a good buy.

Price Fluctuations
The price of a stock fluctuate for many reasons. The company could be reporting its earnings; the industry may have taken a hit with its commodity being trashed, a new law banning the use of a product, etc. There are plenty of reasons for a stock to move and that’s what makes it so hard to trade stocks. Well, everything is hard to trade actually.

Risk
There are various types of risk ranging from market risk to political risk. Geez, even natural disasters can storm the market and there really isn’t much you can do about it. You need to assess the risk of the economy in general. You need to take a look at how industries are doing and if the company you are looking at is living up to the minimum standards of the industry.

You also need to think about the stock risk in terms of your portfolio. Are you buying a value stock? Are you sure it’s value and not just a dead stock that will continue to fall? Are you buying a growth stock that really has growth potential? You need to decide how risk averse you are setup your portfolio from there and invest in stocks that will match your risk tolerance.

Should you make it Part of Your Portfolio?
Yes, no question about it. There’s a reason why the stock market is so popular, people know that you can make a living off of it or at least have it help your financial wealth. Of course, not everyone will be come a millionaire but having a stock portfolio is essential to any investment portfolio. The percentage that it takes up of your portfolio will completely depend on your needs. Your age, risk tolerance, income needs, among others will construct the face of your portfolio.

Compared to bonds and fixed income securities, the stock market it more volatile. Volatility is risky but if you have it under control you can reap the capital gains that you wouldn’t see with bonds or fixed income securities. Remember, risk can lead to healthier gains. Although, just because you take on more risk doesn’t guarantee a higher return. Just go to Las Vegas to find out.

 

Mo2 Thinks...
The stock market is massive, although it isn’t the biggest traded market (all of them combined) in the world; it’s by far the most publicized. The dividends that are paid by these stocks can add a nice addition to your portfolio. The dividend itself should not determine if you want to buy the stock but it can be a factor. Stocks are more volatile and lead to more risk in your portfolio; however, greater risk can sometimes lead to greater returns. The stock market can help you realize the gains you need for the future.

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If you would like to comment on this article or anything on this website, please feel free to e-mail Mo2. He can be reached at Mo2@Mo2Thinks.com. Thank you for visiting!