The Timid Investor

What is it about investing money in stocks that makes people scared? Historically the stock market has had an average annual return of about 12 percent. Compared to interest bearing savings accounts or money market accounts or even Certificates of Deposit (CD's), one would be uninformed to not think about the potential gain in capital the stock market may bring. People may say that they don’t know too much about specific stocks or even what stock is and what it means to own stock in a company. Even if you are one of these people, there are other ways to invest in the stock market without buying specific stocks.

Index funds are a very popular way to invest in the stock market with a very low amount of risk as well as cost. Many investment firms have funds that follow the major indexes. These would be the Dow Jones Industrial Average, the Standard and Poor 500, and the NASDAQ Stock Exchange. These exchanges don’t cover all stocks on the market, but they are a fair representation of the overall market. When people say that the stock market has an average annual gain return of about 12 percent, these indexes are usually their proof. So if you are unsure of which industry or even which specific stock to put your money into, these three indexes would be a very safe place to put your money.

Besides the index funds, there are other funds that may be of interest to you. Mutual funds are also like index funds in the sense that they are made up of a group of stocks. However, they differ in many ways. One, mutual funds can be made up of stocks in one industry or many industries. These funds may also be specializing in the size of the companies they invest in such as small caps, medium caps, and large caps. Most mutual funds also pay quarterly dividends to their stockholders. This might sound good, and it is, but it also increases your tax burden as it adds to your income for the year. Mutual funds are also actively managed unlike index funds, which means the fund managers will charge a higher fee to its customers and decrease total gains you may make over the year. For example, if the fund appreciated 6 percent for the year and the fund had an expense ratio of 1 percent, your total gain would be only 5 percent.