Investing offers a lot of opportunities and challenges essay
Investing offers a lot of opportunities and challenges, and there are a lot of variants for investments, starting with bank deposits ending with stocks and bonds and other options such as real estate investments. There are less risky variants of investment such as US Treasure Bonds and other bonds and debentures; however, these investments also provide a relatively low rate of return. Investing into equity capital of different companies is a more risk-seeking approach, which, at the same time, allows to generate higher returns. The effectiveness of stock investments is directly related to the financial success of the chosen companies, and it is highly important to diversify investment portfolio in order to reduce market risks and to secure the investment against stock price fluctuations of particular companies. The purpose of this paper is to consider the benefits and risks of stock investments, and to choose how to invest part of $95,000 sum into the stocks of one particular company.
According to Fields (2011), “an investment is the exposure of cash that has the objective of producing cash inflows in future” (Fields 2011, p. 156). Stock market investments have a lot of advantages. Dividends paid by public companies allow to generate a good level of income, and capital growth associated with well-performing stocks provides virtually unlimited possibilities for increasing initial investments. Shares are highly liquid, and can be purchased or sold in a relatively small period of time. Information on stock market is regularly updated, and the investor can quickly react to market changes, and increase or decrease investments into shares of a particular company in accordance with market tendencies. There are minimal entry and exit fees for stock market investments, and there are no holding costs compared to the other types of investments (e.g. real estate). Stock investments are also easy for record keeping purposes, and in some states, there might be tax benefits associated with interest payments on loans for stock investments and unrealized capital gains.
At the same time, investing into stock market is associated with a number of risks. Share prices at the stock market fluctuate daily, and there are three major risks to which the investor is exposed while dealing with the stock market. First of all, the investor deals with the risk of share value decrease; in this case, the person can lose a significant sum of money. Secondly, the company can stop paying dividends or decrease the payout if the company’s business activities decline. Finally, there is a risk of company liquidation, if its business will suffer losses, and in this case, the shareholders will be one of the last to get their funds back. Thus, the investor should optimally diversify the portfolio while taking into account the benefits and risks of stock market.
From an existing sum of $95,000, it is supposed to invest 75%, or $57,000, into long-term stock market investments. Optimally, these funds should be invested into the stocks of at least three companies from different business spheres and with different betas, in order to minimize the risk of the portfolio. However, since it is required to choose one stock for major investment, it is necessary to choose a company which does not yield a high level of risk, and the stocks of which are expected to grow in the course of time. It is optimal to choose a company from the industry which is expected to grow in future. The chosen industry is computer hardware and software, and the chosen company is Dell.
There are several reasons why the stocks of Dell were chosen for investment. First of all, this company has an A- rating, according to 2012 forecasts of computer industry development. Secondly, its shares have declined in value compared to summer prices, but started growing again since autumn. These stocks are not so overvalued as, for example, the stocks of Apple Inc. and thus the stocks of Dell are expected to be an effective investment. Beta of Dell is 1.26, which means that the company is exposed to a greater level of risk than the average market company, but this investment can also provide a greater level of profit in future (Dell Key Statistics, 2011). Dell is not currently paying dividends, but the company announced that they might start paying dividends in 2012. Thus, the expected dividends plus the expected growth of share value are very likely to be a significant investment. Recent value of Dell stocks is $15.45 (Dell Key Statistics, 2011). It is recommended to purchase 3,700 stocks of Dell Inc. at $15.45, and the total price of the purchase is $57,165, The remaining sum of the savings is $37,835. This investment is expected to be a valuable part of the portfolio and to generate a significant return in 2012 and during subsequent years.
