Trading in stock could be one of the most profitable types of trade for people who look forward to financial gains both in the short long run. With $10, 000 to invest in stock, I have an option of picking five different types of stock, blue chip, growth, income, penny, and preferred stock to invest in. literature reports that blue chip stocks represent the most established firms such as the members of the Dow Jones Industrial average as well as other main market indexes. The companies involved in this type of stock operate at the global scale, and have diversified their operations with predictable earnings ( Van Rooij, Lusardi, and Alessie, 2007 ). It is reported that such types of stock present value to each investor for the fact that they give capital appreciation, have low volatility, and give dividend.
On the contrary, the growth stock represents the firms that experience rapid growth within their respective industries as well as markets. According to extant literature, such types of stock have huge high ratios of price to trailing 12-month earnings since the people that invest in them anticipate sustained high revenues and sales from the companies ( Van Rooij, Lusardi, and Alessie, 2007 ). Such high investor expectations could also represent high levels of price volatility, specifically is such firms fail to deliver on their projections of profit. However, it should be noted that companies that expand rapidly do not pay dividends to their shareholders since they engage on re-investing the surplus money into their operations. Concerning the income stock, it is reported that the companies that offer them pay out regular dividends to their shareholders after deductions of tax from their incomes ( Van Rooij, Lusardi, and Alessie, 2007 ). The firms also set aside money to fund their operations as well as strategic acquisitions before they return their surplus cash to shareholders. Lastly, penny stocks are offered by small companies, are expensive yet speculative, and trade over the counter. Penny stocks are generally traded in low volumes, which implies that investors might not buy or sell at favorable prices ( Van Rooij, Lusardi, and Alessie, 2007 ).
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Regular news on the importance and the performance of the New York Stock Exchange Market (NYSE) inform my choice of investing in blue chip stock. For instance, the news’ regular update on how bigger and more established companies outdo smaller ones in the stock exchange both in the volumes of shares sold and the revenues gained represent the profitability that investors in their shares are likely to generate in the eventual process. The performance of stock purchased in the blue chip category could be assessed using three market indexes. The first index is the S&P 500 Index, which reveals that purchasing stock worth $10,000 will change (according to data for the past one week) by -0.14%. however, a choice of purchasing stock from Acuity Brands Inc. (one of the firms that offer blue chip stock) worth the same amount is projected to improve by a median of $215 per stock from the current 199.41 per share (CNN Money, 2017). This change would represent a gain of in the value of the total shareholding in the company since;
The net gain or loss in the value of stock= ((the current price of stock less the purchasing price of stock)/the purchasing price)*100
$((215-199.41)/199.41)*100
=7.82%
It means that the total shares held in the company will be $78180.63 (10000*7.82) at the end of the trading period. The investment will earn dividends of $6.52 per month since the company offers a dividend of $0.13 per share invested in a month. At the end of the year, my value in shares of the company is projected at $78180.63, and the dividends receivable will be (50*0.13)*12), which will be $78. 24 per year (since $10000 will only purchase 50 shares of the company). Over the four months period of investment, the dividends earned from the investment will be $3387.83
Using the Dow Jones Industrial Average Index, an investor stands to benefit by +0.55 gain in the value of stock invested (). However, my choice of a specific firm, Apple Inc. will represent real value for the money invested since it is forecasted that the share prices of the company will rise to a median of 202.00 per share from the current price of 145.53. Using the same model of calculation of the net gain or loss in stock reveals that my investment in the shares of the firm will rise by 13.38% from $10,000 to $133800 (CNN Money, 2017). The dividends gained from such an investment will be $109.48 for a month since apple pays a dividend rate of $1.61 per share and 10,000 will buy 68 shares. This amount of dividends will amount to 1313.76 per year.
Lastly, the Russell 2000 Index also presents a chance to choose a potential company with whom the money can be invested. Specifically, Cara Therapeutics, one of the firms that sales its shares under this market index, offers its shares at $12.56 per share, which means $10,000 will buy approximately 796 shares of the company (Market Watch, 2017). Projections on the value of one share indicate that the prices of the company’s shares will rise to $13.69 (8.99%). This way, it means that the value of my investments in the company will be at $89968 after one year. Such a value of investment will allow me to earn dividends of $221.288 per month. Therefore, the analysis indicates that buying shares in the Cara Therapeutics, one of the firms that use the Russell 2000 Index, would be the most profitable.
References
CNN Money (2017). AAPL - Apple Stock quote - CNNMoney.com . Money.cnn.com . Retrieved 12 July 2017, from http://money.cnn.com/quote/quote.html?symb=AAPL
CNN Money (2017). AYI - Acuity Brands Inc Company Profile - CNNMoney.com . Money.cnn.com . Retrieved 12 July 2017, from http://money.cnn.com/quote/profile/profile.html?symb=AYI
Market Watch (2017). Cara Therapeutics Inc. Marketwatch.com . Retrieved 12 July 2017, from http://www.marketwatch.com/investing/stock/cara/analystestimates
Van Rooij, M., Lusardi, A., & Alessie, R. (2007). Financial literacy and stock market participation (No. w13565). National Bureau of Economic Research.
