![]() Active investing relies on differentiating between a stock's value and the market price. Analysts are always on the lookout for the best values or companies with strong growth prospects. 2 Such analysts use research, forecasts, and judgment to recommend whether to buy, hold, or sell the given stocks. The goal is to earn high returns that "beat" (outperform) the stock market. The active management investment strategy relies on a staff of highly paid analysts to build a portfolio of stocks. Investment Management Strategies: Active and Passive A variety of stock mutual funds are available based on different investment strategies (e.g., growth funds or value funds-see the boxed insert "Stock Fund Investment Strategies") and management strategies (active or passive). Most investors simply don't have the time or money to create and manage such a fund on their own, so mutual funds offer a cost-effective way to diversify. A stock mutual fund is an investment product that pools the money of many investors to purchase a variety of stocks to make a profit for the investors. One financial instrument designed to provide investors with diversification is a mutual fund. In other words, don't put all your eggs in one basket. For example, if you invest all of your money in the stock of a single company that owns several beach resorts along the Gulf of Mexico, a severe hurricane could devastate your portfolio. Diversification reduces risk because it is unlikely that all the stocks in a portfolio will react the same way to market events. So a diversified stock portfolio could include stock purchases across industries, company size, and even geography. Diversification means to invest in various financial instruments-not just a specific one. An effective way to minimize the risk of investing in stocks (a relatively risky financial asset) is to diversify. Louis.Įvery investor hopes to earn high returns-dividends plus capital gains-while minimizing risk. FRED ® (Federal Reserve Economic Data), Federal Reserve Bank of St. "Annual Returns on Stock, T.Bonds, and T.Bills: 1928–Current." New York University Stern School of Business, January 5, 2016. Capital gains are the profit from the sale of a financial investment-for example, when a stock is sold for more than the original purchase price. Dividends are often paid quarterly and are commonly associated with established, profitable companies. Dividends are shares of a company's net profits paid to stockholders. Investors earn money on their stock purchases through dividends and capital gains. Investing in stocks has risks, but over time, the stock market tends to have higher average returns than other popular investment options (see the boxed insert "Stock Market Returns Over Time"). ![]() Savers have many investment options to choose from. Hence the joke-a $20 bill left on the street for any length of time might not be a real $20 bill at all. If there's an opportunity to make a profit, buyers and sellers will swoop in and take it. Financial markets are said to be "efficient" if they leave no "money on the table" for very long. The joke is meant to exaggerate the belief held by many economists that markets quickly adjust to new information. The older economist says, "Don't bother! It can't be real or someone would have already picked it up." The younger economist says, "Look a $20 bill" and bends down to snatch it. 1 In fact, there's an old economics joke about market efficiency: Two economists walk down a sidewalk-one is older and wiser and the other is younger and less experienced. Instead, you might hear about the "efficiencies" of markets. If you ever ask an economist which stocks to buy, chances are you won't get a specific answer. The others are July, January, September, April, November, May, March, June, December, August, and February." This is one of the peculiarly dangerous months to speculate in stocks. ![]()
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