Investment Tips: Investing In Stocks By Term

How to invest in stocks by term, and the advantages and disadvantages of short, intermediate and long term investments.

As everyone knows, investing in the stock market is risky at best, unless you are an experienced investor. In addition to picking the right shares to buy, the length of time you keep the shares before selling them can also be an important factor - and the difference between making a loss or profit. This concept is generally known as "˜investing by term' - the term being the time period that you own the shares.

Generally the term that an investor owns shares is defined as being short, intermediate or long. Short term usually means one year or less, intermediate is defined as being five years or less, and long term is considered to be anything longer than that. In general, investing in stocks is less risky and more predictable - and hopefully, more profitable - the longer you own the shares. Of course, share prices tend to fluctuate on a daily basis, but there is usually an underlying trend for them to go up or down over an extended period of time. Several factors can influence the term that can be best for a particular stock, as well as your own goals and "˜risk tolerance level'. Before making any investment, or buying any shares, you need to do your homework on the company in question; its recent profits or losses and any trends or predictions for the future. Before investing in the stock of any company that is becoming public for the first time, read the company's prospectus that they are required by federal law to put out.

Because stocks can be so unpredictable over a short period of time, they are not usually a good choice for short term investments - you may be better of with a more predictable investment such as a savings account or certificate of deposit. True, many speculators have got rich quickly by investing in startup companies, and then immediately selling the shares when they soared in value; but for most of us this doesn't usually happen. Stocks are not considered a good investment for short term financial goals unless you are prepared to lose your investment.

Intermediate stocks are generally considered to be a much safer and less risky investment than short term stocks. An intermediate stock in a steady reliable company in a necessary industry such as food or utilities is usually a fairly safe investment. You may not make a fortune - but neither will you usually lose your money. Another advantage to keeping shares for longer is that many such established - and profitable - companies will pay yearly dividends to shareholders. Companies that regularly issue dividends also tend to have much more stable stock prices. There are also tax advantages to owning your stock for a longer term - the tax rate on your investment is around 20%, a lot less than the 28% tax rate on short term investments.

Finally, there is investing for the long term, which given the unpredictability of the stock market is probably the safest form of investment. You still have to do some research - you want to buy shares in long established and successful companies who are not going to go out of business any time soon. Study long term trends and predictions - keep in mind that you may own this stock for 5 years or more. Try to spread your money around over several different companies, rather than invest it all in one place. The recent Enron fiasco is a good example of how other similar stocks can be adversely affected - in that well-publicized case a lot of other energy stocks went down in value too. Even in times of economic uncertainty, carefully selected stocks have nearly always been proven to be a profitable long term investment. Investing over the long term is also an excellent way of saving for those far away goals such as retirement, buying property or financing children through college.

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