The Dow Jones has fallen 10,000 points in the last month, continuing Thursday, Investor’s Business Daily reported. Now firmly in a bear market, several stocks are rallying after major losses. It’s time to go back and learn investing from scratch.
After falling 10,000 points in the last three weeks due to panic regarding the coronavirus, the Dow Jones has seen occasional brief surges throughout the week. The rise on Thursday began after dipping 700 points at opening.
Dow Jones stock Boeing tumbled 11 percent, while Amazon stock rallied four percent, as the stock market correction worsens,” the Investor’s Business Daily article said. “Within the current stock market crash, the tech-heavy Nasdaq is down over 22 percent year to date through Wednesday’s close. Meanwhile, the S&P 500 and Dow Jones Industrial Average are down 25.8 percent and 30.3 percent, respectively, through March 18.”
If you’re taking advantage of low stock prices and considering investing for the first time or reinvesting after a loss, there are some basics to know before you do so.
Value Investing and Growth Investing
Several approaches can be followed for investing in the stock market. Each has its own philosophy worth considering.
“One approach is value investing, which means trying to buy stocks at a discount to their inherent, or intrinsic, value,” said Dr. John M. Longo, Professor of Professional Practice in the Finance & Economics Department at the Business School of Rutgers University. “Value stocks tend to sell at a discount to the market because of certain problems, or ‘warts.'”
Dr. Longo explained that one such example was Apple, one of the biggest companies in the world, which was on the verge of going out of business in the mid-1990s. Steve Jobs returned to Apple and helped transform it into what it is today. According to Dr. Longo, value stocks look ugly on the surface, but could be beautiful for your portfolio in the long run.
“Another popular approach to picking stocks is called growth investing,” he said. “Growth-oriented investors are not so concerned about buying an asset at a discount. Instead, they are looking for leaders in an industry—the next Amazon or Alphabet or Google.”
Size Doesn’t Matter
Dr. Longo said that one way to differentiate between stocks is by the size of the company, or how much it would cost to buy the entire firm. However, big companies and small ones both have their advantages.
“Large companies tend to be more established, have a longer history, and may pay dividends,” he said. “A dividend is basically a check the company sends you in the mail. Some companies can generate more money than they can reinvest [for] profitability, so giving a dividend to their shareholders is one way to use that excess cash.”
On the downside, investing in a huge company means you virtually never know anything that everyone else doesn’t, making it harder to beat the market. Buying shares in smaller companies circumvents this problem.
“‘Small-cap companies’ are usually defined as firms valued at less than $1 billion,” Dr. Longo said. “Small companies typically outperform large companies over long periods of time by about two to three percent a year. These firms also introduce you to about 50 percent more risk into your portfolio than their larger counterparts—and by risk, I’m referring to the volatility of returns in your investment portfolio, a statistical measure known as standard deviation.”
Risk, Dr. Longo said, can be either good or bad. Smaller companies have a lot of unknowns; so they could bust and you could lose your investment. However, a small-cap company that goes big could make for a very happy holiday season at your house.
Sticking with one investment philosophy and making calculated decisions about large-cap and small-cap stocks of companies can be a safe practice for beginners and for those returning to the market after the recent downturn.
Dr. John M. Longo contributed to this article. Dr. Longo is a Professor of Professional Practice in the Finance & Economics Department at the Business School of Rutgers University. A Chartered Financial Analyst (CFA), Professor Longo earned an M.B.A. in Finance and a Ph.D. in Finance from Rutgers, where he also received his B.A. degree.