Have you decided it’s time to start investing in the stock market? Investing in stocks for the first time can be daunting, even for those who are financially inclined. As a first-time investor, there are three ways for you to begin:
- Individual stocks
- Mutual funds
- Exchange traded funds
These options exclude investments in private companies that are not traded on the public market, such as Neiman Marcus, Dell, and Mars Candy Company.
In my last series, I wrote about how investing in a diversified basket of stocks can help reduce volatility over the long term. While patience may potentially be rewarded when investing in a diversified portfolio of stocks, the same logic does not necessarily apply to picking individual stocks.
Three noteworthy examples suggest that while investing in a diversified pool of stocks can potentially pay off, patience with individual stocks may or may not. In the financial sector, Bank of America was trading at nearly $50 a share in June 2007, and as of May 15, 2015 was trading at about $16.75 a share. Technology company Cisco, which manufactures routers and switching equipment, was priced at $77.31 a share in March 2000, and as of May 20, 2015 was trading at $29.43 a share. There are also numerous examples of individual stocks, such as Dell, where prices declined, the company went private, and it may or may not go back into the public market for individual investing. It turns out that just picking big companies may not always be rewarded, which is why diversification becomes critical.
S&P 500 Index
The S&P 500 is perhaps the most widely recognized and traded index in the country. The index includes 500 of the largest U.S. companies that are among the most heavily traded and recognized. The S&P 500 index only represents domestic stocks, which account for about 45 percent of the global stock market capitalization. The index is "capitalization weighted," which means that larger and potentially more expensive stocks represent a larger percentage of the index. For example, Apple, Microsoft, and Exxon are currently the three largest stocks in the S&P 500. The S&P 500 index is divided into 10 sectors, and is weighted based on the size of the respective companies in each sector. The following reflects the percentage weightings of the 10 sectors.
20 percent, Information Technology: Apple, Microsoft, Google
16 percent, Financials: J.P. Morgan, Goldman Sachs, Berkshire Hathaway
15 percent, Healthcare: Johnson & Johnson, Pfizer, Merck
12 percent, Consumer Discretionary: Walt Disney, Home Depot, Starbucks
10 percent, Consumer Staples: P&G, Walmart, Phillip Morris
10 percent, Industrials: GE, 3M, Boeing
8 percent, Energy: Exxon Mobil, Chevron, Schlumberger
3 percent, Materials: Dow Chemical, Praxair, Air Products
3 percent, Utilities: Duke Energy, Southern Company
2 percent, Telecom Services: T-Mobile, Sprint
If you want to invest in the stock market, but don't know exactly where to start, consider taking basic “Investments 101” at a local college. Tune in to my next article, which will introduce other indices that are gaining the attention of investors, such as the EAFE index (Europe, Australasia, and the Far East) and the ACWI (All Country World Index).
Securities offered through FSC Securities Corporation, member FINRA/SIPC. Advisory and insurance services offered through Stavis & Cohen Financial, a registered investment advisor not affiliated with FSC Securities Corporation.
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Investing involves risk including the potential loss of principal. No investment strategy, including diversification, asset allocation and rebalancing, can guarantee a profit or protect against loss. Indexes are unmanaged and cannot be invested in directly.
Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed and the accuracy of the information should be independently verified.
Past performance does not guarantee future results. This material is for informational purposes only. It should not be construed as investment advice, and is not a recommendation, offer or solicitation to buy or sell any specific security.
Deborah Stavis is a member of the DailyWorth Connect Program. Read more about the program here.