Three Stock Investment Basics All Families Should Know

By the end of 2009, U.S. registered investment companies managed over $12 trillion in assets for nearly 90 million American investors. Families owning a 401K, a 529-college fund, mutual fund or even single stock need to understand the stock investment basics. The media and other investors often mention these investment principles. Unfortunately, few family investors really understand the investment facts behind them. [1 see Figure 1.1 & Figure 1.3]

The Dow Jones Industrial Average

The Dow Jones Industrial Average is only small part of the overall stock market. The average family investor does not realize that the Dow Jones Industrial Average indicates the performance of only 30 stocks in the stock market. Even fewer people know that Charles H. Dow created the Dow Average in 1896 to bring a sense of stability to the stock market to attract investors. In 1896, investors preferred to buy predictable interest rate bonds that had collateral assets such as factory buildings or equipment to back them. They avoided purchasing stocks.

Today the media focuses so much on the "Dow Average" that investors may panic when the Dow Jones Industrial Average declines thus effecting stocks not represented within the chosen thirty. This fact is important for new investors who may panic sell at a loss because of a large Dow Average decline rather than look at the fundamentals and growth opportunities of the individual company they are interested in investing in. [2][3]

Buying into the Market

A common mistake made by many new investors is that they need to hire a commissioned broker to purchase investment funds such as bonds, mutual funds and stock. This is not the case. In fact, investors do not need an intermediary or a lot of money to purchase stocks.

Trading companies allow investors to purchase stock with as little as $500.00 to invest with trades starting at $4.00 per transaction. Many of the thirty Dow Jones Industrial Average companies offer stock savings programs where investors can purchase stock with a low monthly investment. A good example of this is IBM's Direct Stock Purchase Plan, which allow investors to start with as little as $500.00. [4][5 page 12]

Asset Allocation

Financial analysts called it asset allocation, but the concept behind it is a balance portfolio. A balanced portfolio spreads a family's investment dollars into a variety of investment areas in order to protect at least a part the overall investment from declines in price or failure. A good portfolio balance should include equalized investment areas in Cash Investments such as saving accounts, set Income Investments such as Bonds, and Growth Investments such as stocks. [5 pages 15-18]

References:

[1] Investment Company Institute: 2010 Investment Company Handbook

[2] Yahoo Finance: The Dow Jones Industrial Average Stock

[3] Dow Jones Indexes: Dow Jones Industrial Average Overview

[4] IBM: Investor Direct Purchase Program

[5] U.S. Securities and Exchange Commission: Investor Tips: What You Need to Know About Trading In Fast-Moving Markets