Here are some handy tips from my experience with the indian stock markets - Banking Sector. Inflation is the key factor here. With inflation, expect the RBI to hike lending rates, which would have a ripple effect (other banks will be … Read More…

There are a vast number of investment opportunities available to potential investors, but not all of them are right for all purposes. The most common types of investments are stocks and bonds. Stocks are shares of individual companies, while bonds are government-issued investment funds. Both can be great for starting in the investing market, but you should know a little about the difference between the two before making your investment.

Stocks

Stocks can help balance out a bond-heavy portfolio by providing diversification

Stock dividends also receive more favorable tax treatment than bond payouts.

If you make the decision that stocks may be the place for you to put your investment dollars, you must now determine the primary purpose of your stock investment.

The two primary stock investment goals are income and growth. You can have a combination of the two in one stock investment, but the features are almost never equal. In other words, although growth and income may co-exist in a particular stock investment, the investment choice you make should take into account the primary strength of the stock.

Growth Stock vs. Income Stock

Growth stock is stock in a company that doesn’t pay cash dividends, but instead reinvests its profits into the company. The idea behind this strategy is that the company will continue to grow and become more profitable, driving the stock price up.

Income stock is stock in well-established companies that do not need to reinvest their profits into their companies and therefore use their profits to pay dividends to stockholders. Income stock is often more expensive because the income stream and security of the investment is greater.

Mutual Funds

Many investors invest in the stock market through mutual funds. Mutual funds are professionally managed and are easier to diversify your investments in, which makes them less risky than investing in individual stocks. You still have to research what type of stock will best suit your goals, but the average investor finds it less stressful to invest in the stock market through this method.

Bonds

Bonds, though some consider them ?safer? than stocks, still come with risks. Some bond funds offer enticing payouts but may take big chances to do so, including venturing into lower-quality and longer-duration credits; if your funds’ bonds lose value, you could see your principal shrink even though you’re pocketing a healthy yield. Checking a fund’s quarterly losses can be an easy way to see whether you could stomach a given fund’s short-term losses. There’s nothing wrong with making room for some higher-yielding bond funds around the margins of your portfolio, but consider these income-heavy funds to be side items because of their greater potential for volatility.

And while paying for high-quality financial advice can be money well spent, think carefully before paying a sales charge for a bond fund. If you’re paying a 3.75% load to buy a bond fund (and that’s a pretty low load), you’re surrendering most of your first year’s income payments from the get-go.

Individual Bonds vs. Bond Funds

Many investors prefer to invest in individual bonds rather than bond funds. While that’s a reasonable tack if you’re buying Treasury securities or perhaps even extremely high-quality corporate bonds, it makes sense to opt for a professionally managed bond fund for every other type of fixed-income security. Not only will a mutual fund offer you much more diversification (and therefore lower risk) than you could obtain by buying individual bonds, but smaller investors who are buying and selling individual bonds are also at a big disadvantage when it comes to trading costs.

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It’s been said that nothing is certain except for death and taxes, but there are likely many people who feel that the fluctuations of the stock market should be added to the list. It is nearly impossible to find a stock or other investment that doesn’t fall in value at one point or another while you own it… some even make a regular habit of it.

In order to get the most out of your investment experience, it’s important to recognize patterns in the performance of certain stocks so that you can get a better feel for how long their occasional fluctuations might last and help you to decide whether or not you should sell the stock or see it through until prices rise again.

Defining Cyclical Stocks

Cyclical stocks, as the name might imply, are stocks that periodically fall in value and then rise again soon after. The apparent cycle of gain and loss can be caused by several different situations, from economic trends and seasonal products to the stocks being issued by companies that do the majority of their business during certain parts of the year such as holidays or tax preparation season. In most cases these stocks don’t suffer a major loss over the course of the cycle, due largely to the recovery that occurs later in the cycle.

Some cyclical stocks perform these actions in reverse, as well… instead of falling in value, they increase the value of their shares for a time and then the prices return to their normal state.

The Fluctuations of Cyclical Stocks

Of course, the fluctuations of cyclical stocks tend to make some investors shy away from making a major commitment to what tend to be at best a form of seasonal investment. Individuals who are looking for good short-term investments often consider these fluctuations to be more of a godsend, however, and are much more willing to invest larger sums during the low point of the cycle in hopes of reaping greater rewards when the value of the stock shares peaks. Of course, this plan isn’t foolproof… changes in the market or the economy can either stimulate or delay the cycle, making the cycle start later or last longer.

Additionally, some cyclical stocks are only temporarily in a cycle so investing in them with the hopes of their repeating of past performance can cause problems with cycle planning when they begin either rising or dropping in value and then fail to recover or if they fail to do either.

Deciding Whether to Keep or Sell Cyclical Stocks

Of course, cyclical stocks can cause undue stress when their value begins to fall… the decision must be made to either hold onto the stocks until the value recovers or sell off at least some of the shares of stock in order to avoid a potentially large loss of investment revenue.

The decision remains up to the investor, but a well-diversified portfolio that contains investments in cyclical stocks should be able to bear temporary losses in stock value without a great degree of difficulty since if the stock is truly cyclical it will recover within a reasonable amount of time anyway.

Cyclical Stocks and Long-Term Investments

Of course, cyclical stocks can be used effectively for long-term investments. The growth end of the cycle is usually increased slightly with each revolution of the cycle, so investors who choose to purchase cyclical stocks and hold onto them for a number of years may find that when they finally sell them the value is much higher than it would have been for short-term investments.

You may freely reprint this article provided the following author’s biography (including the live URL link) remains intact:

About the Author

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the www.directonlineloans.co.uk website.