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Florez | 1 Johnathan Florez Professor Eason April, 16, 2011 A Safer Perspective in Stock Investment Investing in the stock

market can have a negative connotation as being only for the excessively wealthy or for extreme risk takers, but this cannot be further from the truth. Stock markets although having a volatile nature making it riskier than other forms of investments can be molded to the specific portfolio holder for a less uncertain strategy. There are numerous reasons to invest in stock, but a common influential reason is that the Stock Market has proven for the past thirty years to have an average return on investment of about 8% to 10%, this not only increases your revenue, and Net Worth, but it also allows for you to remain ahead of the average inflation rate of 3%. Stock market is malleable to the holder; unlike many other investments that have specific investment options the Stock Market has a much larger variation in investment options. Diversification allows for the portfolio to be tailored to your specifications, and a significant reducer in risk. Liquidity is a very important factor to consider about stocks. Homes, Vehicles, Works of Arts, and other investments like Bonds, Debentures, or CDs that come with lock-in periods cannot be converted into cash as readily. This Investment option is also one that has very low start-up capital and is perfect for investors who have only a few hundred dollars to invest, and cannot afford thousands or even hundred thousand dollars to invest in real estate or other assets. Keeping your assets, and investments are just as important as making investment decision to begin with, so there are techniques that can help you remain in a safer conservative position.

Florez | 2 Stock diversification using the Horizontal Diversification Method is the idea of not only to diversify but to select companies from various market sectors that have no relation or minimal relation within each other. Along with this technique there is also the dollar amount to invest or risk margin as it is known, this becomes subjective to the individual, but to remain on the safer spectrum 5% to 7% of the portfolios general value should be invested solely on one individual stock. It is not uncommon for a Stock to decrease over 50% in a volatile market, but if its only 5% to 7% of the portfolio the financial hit will not be as devastating. Value Investing is the safer strategy to selecting the stock because it focuses on the actual Value of the Stock, thus selecting an Undervalued stock to invest. In contrast to Growth Investing which regardless of the companys actual financial standing focuses on the profitability of the stock. Value Investing reduces the risk of underperforming investments by having secure bases for the decision, and disregarding Hype or mass hysteria since it does not affect the decision of a value investor. Value Investing strategy has proven to produce gains regularly that outperforms the S&P 500. Now that a strategy is put into place selecting the company is the next decision factor. Selecting a Blue-Chip Stock is the best option because it has a national reputation for quality, reliability and the ability to operate profitably in good times, and bad. Stocks in this category also have been in business for more than 10 years. Afterwords we calculate the Beta Values of the stock which represents the elasticity or volatility of the performance in relation to the stock market. The Beta has to be less than 1 to be considered as safer investment. Return On investment or ROE is a good indicator of the companys historical performance, and should be calculated over a 10 year period to have a better perspective on the financial progression of the company, this is calculated by dividing the companys Net Income and Shareholders Equity. Profit Margin is the profitability of a company, this not only include having a good profit margin

Florez | 3 but also consistent historical gains, this is calculated by dividing Net Income by Net Sales. Has the company avoided debt? should be calculated into deciding whether to invest, the higher the debt the more interest expense the company is going to pay which will be less profit and make the stock much riskier, to calculate this we divide the total liabilities by the shareholders equity. Personality of the stock such as whether it has a unique characteristic or if it relies solely on commodities, this is important because commodities based companies are at the mercy of the commodities and may prove to be much riskier investment alternative, selecting companies that have a wide range of production capabilities is the best alternative. Although the stock market still being a risky volatile environment with a safety belt we can now look at stocks in a different aspect, we still dont want to maintain all of our funds in this type of investment since there is not a guaranteed, and still contains risk. Only 20% -30% of your general savings should be placed in stock investment, 50% to 60% should be allocated to Bonds and always have 20% in Cash this would be the ideal conservative portfolio for someone whom wants to remain well within the safety margin.