Investing in stocks involves owning part of a company’s equity which effectively enables the shareholder to receive a portion of the company’s earnings and assets in form of dividends. Stocks are generally categorized as either common stocks or preferred stocks whereby common stock allow investors to vote on key issues but do not guarantee of dividends (Markowitz 78). Preferred stocks on the other hand do not provide voting rights but assure stockholders of dividend payments. Investing in stocks offers investors comparatively high returns relative to treasury securities but the investments also have high inherent risk. Stocks are purchased through licensed stockbrokers who range from the discounted order-taking online brokers, to the pricey full-service brokers and money managers (Sourd 112). Despite the type of broker an investor opts for, the stock market has the potential to generate high returns through an investment strategy. One of the main strategies employed is diversification which involves the purchasing of different stocks with varied performance and rates of returns in order to spread out the risk of the individuals stocks across a portfolio. Investing in stocks is therefore one of the most profitable alternatives of personal financial planning, and should be considered as one of the investment vehicles that generates an additional income stream.
Significance of Stocks in Personal Finance
Personal income is considered to be a person’s total earnings which can be obtained through wages and salaries, personal business activities, social aid and investment. The choice to invest one’s finances rather than spend on consumption has an overall impact of increasing income as a result of future cash inflows from the invest...
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...g is also important in fulfilling financial obligations such as debt capital, annuities as well as savings. An effective personal financial plan should manage risk through diversification of investment capital, and the stock market provides investors with a viable option for diversification. Investing in stocks is considered one of the most profitable alternatives of personal financial planning, and is generally included to financial plans as an investment vehicle for additional income streams. Investing in stocks also has several benefits, key among them being increasing current and future cash inflows from investments. In addition, stocks offer investors a viable option through which they can achieve their financial goals for retirement, saving or consumption. Stocks are therefore useful securities that can be used to build wealth and secure financial stability.
A very slim minority of firms distribute dividends. This truism has revolutionary implications. In the absence of dividends, the foundation of most - if not all - of the financial theories we employ in order to determine the value of shares, is falsified. These theories rely on a few implicit and explicit assumptions:
Chapter 26 focuses on people’s incomes and how they spend it, a lot of factors affect wealth and how it is spent, The chapter heavily takes into consideration economic growth and recessions and their ability to create a multiplier effect on the overall Gross Domestic Product of the nation. Various methods of spending one’s income are also covered in this chapter. This includes planned investments and unplanned investments.
The stock market is a vehicle to invest money. It is where consumers buy and sell fractions of companies, and is referred to as stocks. A proven method to achieve wealth while keeping up with inflation, comprised of publically held companies who offer goods and services that are used by the general public daily. Companies sell stocks to public investors in a free and open market environment on a daily basis, which is an effective strategy to build a sound financial future.
When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
Highest returns. Stocks have given the one of the highest historical returns among the various asset classes over the long term.
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book “A Random Walk Down Wall Street”. What does a random walk mean? The random walk means in terms of the stock market that, “short term changes in stock prices cannot be predicted”. So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of “purchasing assets to gain profit in the form of reasonably predictable income or appreciation over the long term”. Speculating in a sense is predicting, but without sufficient data to support any kind of conclusion. What is investing? Investing in its simplest form is the expectation to receive greater value in the future than you have today by saving income rather than spending. For example a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally there have been two approaches used by the investment community to determine asset valuation: “the firm-foundation theory” and the “castle in the air theory”. The firm foundation theory argues that each investment instrument has something called intrinsic value, which can be determined analyzing securities present conditions and future growth. The basis of this theory is to buy securities when they are temporarily undervalued and sell them when they are temporarily overvalued in comparison to there intrinsic value One of the main variables used in this theory is dividend income. A stocks intrinsic value is said to be “equal to the present value of all its future dividends”. This is done using a method called discounting. Another variable to consider is the growth rate of the dividends. The greater the growth rate the more valuable the stock. However it is difficult to determine how long growth rates will last. Other factors are risk and interest rates, which will be discussed later. Warren Buffet, the great investor of our time, used this technique in making his fortune.
In finance terms, household income is the combined income of all members of a household who jointly apply for credit. Household income is an important risk measurement used by lenders for underwriting loans. Livingstone and Lunt (1992) emphasizes that the disposable inc...
The purpose of this study is to investigate the investment practices of youth in my region. All youth should be investing financially for the future- for differing reasons. Some reasons may be for when their working years are over, or as a safety net in case they need extra unforeseen reserves. However, not all youth do invest, and those that do- invest differing amounts in different ways. This study will investigate how much the youth do invest, what investment types are commonly used and through which vehicles.
In my research, it has been stated that in order to be reap great financial rewards an investor must first outline an asset allocation that best fit their personal investment and one that would meet their future financial goals. It is believed that determining one’s asset allocation is the most important decision that any investor would make.
According to about.com ( 2014 ), “Investment is defined as any use of resources intended to increase future production output or income” In the process of investing a person must give share to a company or anything that offers growth for their money. The mind of a person investing is focused on how much he will earn in the future. An investor is always thinking about how he will save money for his future and his family. (http://economics.about.com/cs/economicsglossary/g/investment.htm)
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.
It is often said that the greater the risk, the greater the potential reward in investing, but taking on unnecessary risk is often avoidable. As an investor, you can protect yourself by diversifying—spreading your money among various investments, hoping that when one investment loses money, the other investments will more than make up for the losses. Investment is about giving your money to a company or enterprise, hoping that it will be successful and pay you back even more money. So, what are the investment options that one may have? Stocks and Bonds Investors are given an opportunity by companies to invest in stocks or bonds.