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If you are having trouble making sense of all of the possible investment options , you are not alone. There are plenty of news articles reporting on the lack of financial literacy among adults even though economics and personal finance classes are part of the curriculum in many high schools. Unfortunately, adults over the age of 30 are not as financially literate as they think they are. A recent study showed that although 44% of respondents considered themselves to be very financially literate, only 45% of respondents could pass a basic financial literacy exam.
One of the challenges for investors is trying to understand all of the different asset classes and deciding which is right for them. Another challenge is picking the right investment within an asset class. The amount of information can be overwhelming, but there are professional advisors as well as social trading platforms that can help you make sense of the basic asset classes and investment options.
Stocks
When people think about investing their money in the financial markets, stocks are usually the first kind of investment that comes to mind. A stock is an ownership right in a company. Some stocks give ownership rights in private companies that are not traded on a public market. Owning a stock in a private company does not mean that the stock is less valuable than that of a company traded on a public stock exchange. It does, however, mean that the stock has low liquidity and will be harder to sell compared to a stock that trades on an exchange.
The shares of stock for public companies sell on a public stock exchange . Therefore, it’s much easier to buy and sell these stocks. Public companies must adhere to strict regulatory guidelines related to information disclosure and financial reporting. Therefore, investors should only consider buying stocks for publicly traded companies. There are two ways that stockholders can earn money on their investment.
Dividend Yield – A dividend is a cash payment that a company gives to its stockholders. The average dividend yield for firms in the S&P 500 is around 2%. That means stockholders can expect to get a dividend equal to about 2% of the stock price. When a company pays a dividend, it returns part of its profits to the owners of the company (the stockholders). Companies that pay dividends usually disperse them quarterly, but other companies choose to pay dividends less frequently. Some companies don’t pay dividends at all. In general, older, more mature firms are more likely to pay dividends. Younger firms in high growth industries tend to reinvest profits rather than pay dividends to shareholders.
Price Appreciation – The other way that you earn money on a stock is through price appreciation. In other words, you earn money as the stock value increases. A stock’s annual price appreciation can differ dramatically from the market average, but over the past twenty years, the firms in the S&P 500 increased by around 12% annually. Stocks, however, can be a very risky investment. In 2008, the market had a return of -37%, and in 1995 the market had a return of +37%. Also, it would help if you did not forget that you haven’t realized a gain on your stock investment until you sell your shares of stock.