Distribution, more commonly known as diversification, is a standard investment practice involving the choice of investments that are not correlated with each other. The goal: by spreading your money between several stocks or in different forms of investment, you may be able to protect yourself against excessive risk.
As a new investor, however, finding the right combinations can be a real struggle. And the most basic choice is between stocks and products.
Stock Distribution Options
If you are attracted to stocks as the primary mode of investment, one of the easiest ways for new investors to protect their funds and diversify their holdings is to choose an exchange traded fund. (ETF). ETFs work by combining a group of securities that together grow predictably. Although losses are possible, the fund's best-performing stocks protect your investment against the worst performing losses. It is important to understand, however, that you can choose your ETF, but you can not choose the stocks that are there.
For investors who want to choose their own stocks, but do not want to risk everything, another option is to invest in penny stocks. Penny stocks can be risky – they are usually new businesses – but because they are not worth much, you will not be as much money if one or two of your choices down. Penny shares are a good way to gain experience in choosing your own stock, but they are anything but safe.
Commodity considerations
Even those who are new to investing generally understand how the shares work – they are shares of a company, which represent the performance of that business. Commodities may be a little more confusing. When you invest in commodities, you bet on the performance of this item (corn, oil, coffee, etc.) over the next period. These bets are called futures and you must use your predictions to develop a spread of the products.
When trading in commodities, you want to choose goods that balance. This could mean looking at the seasonality of commodities and other variables – oil costs generally increase during the winter, oranges can increase in the event of a hurricane that wipes out crops – while working with less variable investments. Wheat, soybeans and even coffee tend to be less variable than more easily disturbed products. To trade commodities, you need to understand a variety of global trends, not just business activities.
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Stocks of merchandise: the Middle East
Still stuck on what to invest? You might discover that your perfect deal ground is commodity stocks, stocks that are directly related to commodity performance, such as gold mining and oil drilling companies. This may seem like a lot of moving parts, but if you are willing to go beyond the more traditional stock choices, commodity stocks can be a good way to develop an understanding of the products more broadly. In addition, many of these actions are actually diversified internally.
If you want to test the waters of commodity stocks, consider turning to mining companies like Franco-Nevada (FNV). Rather than directly mining, FNV provides miners with money for future gold and silver purchase rights. Thus, while their success is tied to gold and silver rates, the FNV can actually prosper during a downturn in commodities. Their internal diversification helps to protect their performance. In fact, some of the most reliable stocks on a global scale are commodity stocks, such as Exxon-Mobil (EXX) and Vale SA (VALE).
In the end, there is no good way to invest in stocks and commodities, but no matter what you choose, you have to keep diversification in the money. ;mind. The more your choices are extended or balanced, the less likely you are to lose. While there is no certainty, when your investments are not all tied to the same external forces, you are less vulnerable to a storm – literal or figurative.