Investing settlement money is a great way to boost your portfolio and work towards your long-term financial goals. What you do with this money is important and can have a significant impact on your future financial outlook. So, what are the top stock strategies for investing settlement money?
All-in or Slowly?
The first thing you need to consider is whether to invest all at once or create a plan to invest your settlement money slowly and systematically. Investing all at once will give you the longest period to benefit from compound growth. However, if your investment tanks, you may lose a lot of money.
Ultimately it will depend on your circumstances. But research shows that typically, lump-sum investments outperform the systematic ones. A financial advisor will help you understand the best option for your situation.
Buying stock is investing in a public company. When a company sells shares of stock to the public, they are typically issued in one of two main categories: common stock or preferred stock.
Common Stock Investments
Common stock is (as the name suggests) the most common type of stock. If you own common stock, you own a share of the company’s profits and have a right to vote. Owners may earn dividends, but these are variable and not guaranteed.
Next, we have preferred stock. This type of stock pays investors a fixed dividend. Shareholders also get preferential treatment when it comes to dividends. Preferred shareholders are paid dividends before common shareholders, including during bankruptcy or liquidation.
Furthermore, preferred stock prices are less volatile than common stock, meaning shares are less prone to losing value. Likewise, they are also less prone to gaining value. Preferred stock is best for investors who value income over long-term growth.
Other Stock Options for Investing Settlement Money
Within the two main types of stock categories, there are other stock differences. These include classifications such as:
Industry. Also called a sector, stocks are divided into industries. Such as technology or energy sectors. Sometimes, these sectors move together in response to market or economic events. This is why it is important to diversify across sectors.
Company Size. Large-cap, mid-cap and small-cap refer to the value of the company.
Location. Often, stocks are grouped by geographic location. You can diversify by investing in businesses in the U.S. and internationally.
Growth. Growth stocks are from companies that are growing quickly or in a position to do so. Typically, investors are willing to pay more for these stocks since there is potential for bigger returns.
Value. Value stocks are basically on sale. These are the stocks that investors deem underpriced and undervalued. Investing in these stocks assumes that they will increase in price because they are either flying under the radar or suffering from a short-term event.
Investing Settlement Money in Venture Capitalism
A venture capitalist is a private equity investor that provides capital to companies. The company typically exhibits high growth potential and the venture capitalist gets a stake in the equity of the company. For example, a venture capitalist may offer funding for a startup venture, or support a small company’s expansion.
These investors are willing to risk investing this way because there is potential to earn a massive ROI (return on investment) if the company succeeds. However, there is a high rate of failure since there is so much uncertainty involved with new and unproven companies.
Performance-based compensation is an incentive-based form of compensation. It is paid to portfolio managers of investment funds. This performance-based compensation is essentially a reward for good work. It is typically a percentage, and normally given in the form of bonuses or stock options.
Most importantly, this performance-based compensation provides incentives to investment managers to make smart, risk-appropriate investment choices that result in the appreciation of invested assets. When they achieve this, they receive a percentage of the returns as well as managerial fees.
Investing Settlement Money
Choosing the right type of investment can be hard. However, with the help of a financial advisor, you can understand the many options and the importance of creating a diverse portfolio that considers your risk tolerance accurately. To learn more about the options for investing your settlement money, please contact Argent Bridge Advisors today.