How to invest one thousand dollars wisely (Part 3 of 3)
Perhaps the most reasonable and reliable tips a novice investor can receive is to simply have moderate expectations when it comes to returns and be content with a market that does not display wild bouts of volatility. Those investors who have considerable money to burn and the willingness to weather the uncertainties and sharp fluctuations can flock to the riskier assets in order to get their fix in both gambling and potential riches. Yet if $1,000 is a great portion of the money you and your family have to play with on the market, it is best to play like the patient and prevailing tortoise and not the sporadic rabbit. Subtlety and a firm grip of reality are key for any investor and are especially vital for a novice one. Pipedreams of grand returns in short time spans were a major factor in driving so many expecting traders into web of Bernie Madoff, and it was also the reason why so many ill-fated investments were placed into the sub-prime mortgage market. Therefore, the following three-part article is a “broad strokes,” simple and most importantly, safe guide of how to invest on a moderate budget that can get you started on your portfolio.
In the previous two parts of this article, we focused on Mutual Funds and ETF’s as viable ways in which an investor can place his funds into a highly-diversified portfolio without accumulating the individual risks of each separate investment. This final part will detail yet another way for a novice investor to garner returns without placing his/her hard-earned money at risk.
To reiterate a wholly crucial point, investments in specific stocks always represent a higher percentage of risk for any investor. It is the modern world equivalent of placing all of your eggs into one basket. With ETF’s and mutual funds, the collective of your financial hopes do not rest on the unsure future of just on company. With your money placed in dozens of firms, the amount of damage any unexpected occurrence on the market can do is minimized drastically. Yet, for a trader who does want to make an investment into an individual company, options exist to do so without skyrocketing the amount of risk involved.
There are massive corporations in this world that have flourished and established themselves to the point where their advancement through the market is oftentimes a product of sheer inertia. They have a firm reputation, a long-standing history of profit and a devoted clientele. These kinds of companies are obviously much safer to invest into than firms with smaller market capitalization. The market capitalization figure for any specific company can be calculated by multiplying the total number of outstanding shares by the price per individual share. These established corporations also offer major dividend benefits, something that other sorts of investments cannot provide with any sort of sureness.
High Dividends are how big companies with limited room left to expand boost the price of their shares. What they essentially do is pay cash back to their shareholders once large enough profits are generated. The pre-set demand for the product these companies yield, along with an established history of good performance tend to provide a safe space for both small-time investors and whales. The well-rooted industries these firms represent also shelter any potential investment from the high risks a start-up or a smaller company would carry. Sectors like food makers or telecommunications are good examples of these sort of industries.
Dividends are traditionally paid in four quarterly instalments and demonstrate what percentage of your initial investment will be paid back over the course of the year. Any yield larger than 5% is considered to be a strong return, and if the shares prices keep growing, then time will continue to make money for you. Furthermore, dividends also give an investor a chance to continue generating profit even if and after the share price falls. While dividends are by no means a certain bet, they do offer an investor with modest means and a slightly more adventurous outlook a chance to garner returns without dipping into high risk territory.
It cannot be said enough times that no investment, no matter how low-risk is a sure thing. Everything can around, and being prepared for the worst is never a bad policy to undertake when investing. However, for someone with a reasonable outlook on life, who is looking to find a safer investments vehicle that does not generate miracles, chase pipedreams, or offer you the chance to “crush” the market, these options present an easily available and viable way of how to invest wisely. Common sense and patience is all one needs to play the game.