Is stock investment in a volatile market profitable or is stock investment in a volatile market dangerous? This question comes to mind as the NYSE and NASDAQ go up or down more than five percent of their capitalization in a trading day. This seems to be happening more often than any time in the last eighty years, when the worst stock market crash ushered in the Great Depression. Stock investors rely on fundamental analysis of stocks. A stock with a good margin of safety and intrinsic stock value is thought to be a good investment. Long term investors typically scout out good stocks and then wait for a correction in a volatile market to buy goods stocks at cheap prices. The stock market tends to adjust for fundamentals. However, when fundamentals are uncertain there tends to be a lot of adjusting. That can make stock investment in a volatile market a risky endeavor.
How does a prudent investor approach stock investment in a volatile market like we see today? There are a number of long standing caveats to investing. First and foremost smart investors diversify their holding and thereby limit their investment risk. Investors typically pick several market sectors and purchase a stock in each sector. Because different market sectors react differently to changes in the economy the stocks in these sectors will often balance each other out. For example when oil prices go up big oil stocks will rise as well. At the same time many industrial and transportation stocks will fall in value. When oil prices fall so will oil stocks but airlines, railroads, automakers, and steel producers will commonly prosper. One of the basics of learning how to invest is to learn how to develop and balance a stock portfolio.
Dividend stocks are often a good way to maintain income in a volatile market. Stocks like Microsoft – MSFT, Boeing – BA, and Cisco – CSCO, all provide dividends to their shareholders and are substantial companies with a vanishingly low risk of going out of business in tough economic times. As the staggering debts of the EU and the USA draw down economic growth we can expect to see slower returns in the general stock market. Dividend stocks that have been paying routinely for half a century or more are a good bet going forward. In many cases the primary return for the investor may turn out to be dividends.
With the US debt expected to remain high for years and with debt and growth so closely intertwined it is hard to see how the broad range of stocks will appreciate very rapidly in years to come. However, there still are growth stocks. Biotechnology, for example, has barely scratched the surface of possible new ways to improve health, increase food production, and prolong life. One can invest in the giants of the industry such as Roche – RHHBY(owner of Genentech) or any number of small startups with promise. However, to invest in this sector investors need to do their homework in order to understand just what these companies do, what products they are developing, the timeline of getting medications approved by the FDA, and the potential profitability of new products. This sort of stock investment in a volatile market bypasses economic concerns and goes to the heart of whether a company can develop and maintain a profitable product or not.
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