Stock Investment Options

Stock investment is one of the main strategies people have traditionally used to increase personal wealth. There are varying approaches to stock investment, but the general idea is to predict the future movement of a stock in order to make a profit. Investors can also choose between buying individual stocks or mutual funds.

The Facts

Most stocks are traded over a central exchange such as the NYSE or NASDAQ, for example. Stocks that are not traded over a central exchange are referred to as "pink slip" stocks. These stocks are usually inexpensive as they represent smaller companies. When an investor wants to buy a stock, they place an order with a broker, and the broker executes the order and sends a confirmation to the investor.

Types

Traditionally, the most popular form of stock investment has been the buy and hold method. Using this approach, the investor buys stock in a company that is perceived to be strong and holds onto the stock for the long term, usually for a minimum of one year. Another approach is penny stock speculation. This strategy entails buying a cheap stock in hopes that the company will experience substantial growth and the stock price will increase rapidly.

Strategies

Investors who use fundamental analysis attempt to buy stock in good companies that are undervalued or that have good growth potential. These investors examine the price/earnings ratio of a stock as well as the company's financial statement to determine whether or not to buy. On the other hand, those who invest based on technical analysis attempt to predict future movements in a stock's price through chart pattern analysis. Usually, trading volume is also considered in order to gauge the strength of a price move with higher volume indicating a stronger move. Alternatively, some people choose to let someone else make investment decisions for them by working with a financial planner or investing in a mutual fund.

Benefits

The main benefit of stock market investment is the opportunity to make money based on an increase in a stock's price. Also, stock ownership conveys partial ownership of the underlying company, meaning the investor is entitled to vote on corporate matters and receive relevant information from the board of directors. Some stocks also pay dividends the investor can use as a source of cash flow or reinvest to buy more shares.

Time Frame

Stocks can be held anywhere from a couple of months to many years. People who buy and sell stocks over a period of only a couple weeks, days or even intraday are considered traders. The investor attempts to achieve a positive ROI by putting their money into an asset perceived to have value while the trader attempts to profit off of short-term price moves without much consideration of the underlying value of a stock. Even so, there is no definite time division between trading and investing and the difference between the two is semantic to some degree.