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Stock Investments

The basics of stock market investing are that greater short term risk has the potential for greater long-term rewards.

Example, money markets are typically associated with the least potential for investment risk, or the chance that price swings will cause your investment to lose value. As a result, money markets are also likely to provide the lowest long term returns.

Stocks are on the opposite end of the risk/return spectrum. Stocks generally pose the greatest risk of short term price volatility and loss, yet stocks have historically provided the highest long term average annual returns. Bonds are in the middle: They're typically less risky than stocks and generate lower returns than stocks, but bonds are riskier and more likely to generate better returns than money markets.

Stocks are often the investment of choice for two types of investors: Those willing to take a big risk in return for a potentially big short-term return, and those willing to tolerate short-term price swings while they pursue important investment goals that are still many years away.

Types of Stocks

Just as there are many different types of companies, there are many different types of stocks. Stocks are often categorized according to the following descriptions:

A)    Growth stocks and value stocks. Growth stocks are the stocks of companies that have generally performed well in the past and which are expected to continue producing strong earnings and investment returns in the future. Value stocks are the stocks of companies that may be underpriced by the market, such as companies that have not yet been discovered or those recovering from past problems.

B)    Small, medium, and large-cap stocks. The size of a company is determined by its overall stock market value. Another term for overall stock market value is market capitalization, or market cap for short. Stocks issued by relatively small companies are called small cap stocks. Mid cap stocks are those issued by medium sized companies, and large cap stocks represent ownership in the stock market's biggest companies.

As a general rule, investments in large cap and growth stocks tend to be less risky, while investments in small cap and value stocks typically carry more risk. This is because a large, diversified company with a solid track record is more likely to weather rough economic times than a small company that is struggling to generate profits.

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