First Person Stock Diversification and Safe Investing
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Investing in stocks can be an affordable alternative to starting your own business. One of the most important
things to implement before you get started, though, is a proper diversification plan.
What is Diversification?
Stock portfolio diversification means choosing to buy stocks in various companies from different, unrelated
sectors of industry, since the economy experiences shifts in economic cycles. While one or more sectors do
well, others do not. If you are well-balanced, as some of your stocks do poorly, this will be offset by others
doing well. Eventually you will further streamline your choices, thus maximizing your yield. Many people
make their initial and just leave their money there, allowing it to grow and compound interest. But you
should continually invest more. It makes sense that as the value of your investment grows, to buy more
stock at the moments in which the price drops. This is the equivalent of buying more of the product you are
interested in at a discount. For example you may start your first year investing with just $2,500 across 5
different companies (in different sectors such as technology, manufacturing, agriculture, etc.), and
continually buy more stock. Ideally, you should sell off some of those stocks as prices peak, and then buy
more when the price drops again. This allows you to continually make more on the upside, while limiting
your losses on the downside.
How do I know how much to pay for these stocks?
Price equals Earnings times Multiple (P=E x M). You first find out about the company's earnings per share
and divide this buy its current trading (term used regarding the buying and selling of stock) price. The
multiple shows you how many times the earnings people are paying for the stock. You can use that number
to compare to other companies in the same sector to see which a better deal is. For example, shares of Apple
stock may be $318 each, while shares in MIPS Technology may be only $15 each. You might think the
MIPS is a better deal but if the earnings are poor (and depending on the multiple), it may be worth it to pay
more for Apple because it earns money so much faster. Apple may earn at 40% while MIPS is losing value
at -0.22%. It doesn't matter how cheap MIPS seems if you are not making money, or even losing it after
investing.
How can I invest without doing too much work?
In addition to investing in individual stocks, you can also invest in "Index Funds". You would do all the
same steps as buying stocks, except you invest in these funds (which are a collection of certain stocks in the
same sector) and just "let the money ride". Five or more funds in five or more different sectors will still be
considered diversified. You will experience ups and downs, but overall will most likely average 10% over
10 years. You should keep you money there as long as possible. It is better to invest on your own as I have
been describing because you are more in control and actively managing your investments, you are therefore
more empowered to make even more, even a great deal more. But investing in an index is still much, much
better than not investing at all. There are oil funds; gold funds retail funds, etc. These are also referred to as
ETF's, (Electronic Transfer Funds). You buy stock in these the same as you would individual stocks, just be
sure to check the prices. At E-trade it is $9.99 as this is written, just so you have an idea. That means if you
buy 1 to 100 (or more) of an individual companies' stock it is $9.99 to buy and the same if you sell, the same
true of the index funds.
Once you get started, remember this: Whenever, whatever, and where-ever you are investing, always use
"Limit Orders" and also use reputable companies, avoiding any "scheme" operations.
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