Intermediate guide to the stock market - Part 2

Index funds (also known as Exchange Traded Funds) are stocks which track a given index, like the S&P 500, the Dow, or the Nasdaq. They allow you to own an entire market in one stock, and they have a great history of beating most mutual funds over the long term. You can buy many different markets using index funds. For example, you can buy index funds which track: clean energy, agriculture, water, the performance of the dollar verses other currencies, oil, stocks in China, in India, in emerging markets like Eastern Europe and Latin America, and a huge variety of other types of markets!

You can find information about index funds at www.etfconnect.com

While you can't go wrong with a portfolio of index funds, you can do yourself a huge favor by buying shares in large companies. Many large companies, such as Johnson and Johnson, Procter and Gamble, Wal-Mart and General Electric have a long history of not only paying reliable dividends, but also increasing their dividend every year. The power of this cannot be over emphasized. Take, for example, General Electric. The dividend yield on their stock is currently around 4%. But, they have a 30 year history of increasing their dividend by around 12 percent per year. So you can expect the yield on your initial investment to double after six years, to 8%! After 12 years, the yield on your initial investment has become 16% - and this does not take into account the power of compounding. If you were to reinvest the dividends received, your investment would generate over 20% on your initial investment in dividends alone.

To see the dividend history of a company, you can use Yahoo! Finance's "Historic Prices" feature, on the information page of a stock.

Once you have this core portfolio of high quality, sensibly chosen index funds and large dividend paying stocks, use the remaining amount in your portfolio to choose some high quality smaller stocks to give your portfolio the power of growth. To find smaller companies, use a stock screener, and specify a market capitalization of no more than a billion dollars. To be sure you're choosing quality companies, check out the "More Ratios from Reuters" link near the bottom of the company page on Google Finance. Make sure all the ratios on this page are nearly the best in the industry, and be sure the company is not too expensive (look for low price ratios compared to its industry, like the p/e, p/s, p/b, and price to free cash flow - all at the "More Ratios from Reuters" link).

With the proper portfolio construction, you can depend on your portfolio to generate great returns in a variety of market conditions. Decide the risks you're willing to take, arrange your portfolio as described here, sit back, relax, and watch your money grow!