Author: Tim Lemke / Source: Wise Bread
When investing, we are faced with an overwhelming menu of things to choose from. There are tens of thousands of stocks, a mind-boggling number of mutual funds and ETFs, plus a dizzying array of bonds. How can we make sense of any of this to decide what makes a good investment?
It helps to know the basic elements of an investment so you know how to compare one product to another. This may require some work, but it can often be fun to dig into the details of why one investment is better than another. Here are some key things to examine.
1. Growth potential
Most people that are far away from retirement age seek investments that will grow over time. Ideally, they’re looking for investments that will allow them to build a sizable retirement fund and outpace the returns offered by a basic bank account. There are some investments, such as stocks, that historically rise in value and are great for younger investors. Mutual funds and ETFs can offer solid growth as well. Bonds, however, are more likely to offer lower, but more stable returns.
As you become savvier in grasping the inner workings of specific investments, you can become skilled at knowing when an investment is undervalued and perhaps poised for big growth — or overvalued and ready for a price decline. Understanding the growth potential in certain investments can help you find the right mix for your individual portfolio. (See also: 9 Ways to Tell If a Stock Is Worth Buying)
2. Sector and industry
If you don’t know a lot about a stock investment at first, it helps to learn what the company does to make its money.
Companies are grouped into sectors based on the type of business they operate in; within sectors, there are smaller segments called industries. Typically, stocks are grouped into 11 different sectors — including health care, financials, energy, and consumer staples, to name a few — and there can be anywhere from two to 15 industries in each sector. A well-balanced stock portfolio will have some exposure to all of these sectors and as many of these industries as possible.When investing, it helps to learn how these sectors perform compared to the broader stock market. Some sectors perform better than the market, while others underperform. Some are resilient in tough economic times, while others are more vulnerable to bad news. Understanding these industries can help you make smart comparisons when evaluating stocks.
3. Market capitalization and asset class
Stocks are usually categorized by size, also referred to as market capitalization. A company’s market capitalization, or market cap, refers to the value…
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