Gold stocks are secure investments represented by shares in a publicly traded company within the gold sector. In the gold market, these usually take the form of investing in one of the over 300 gold mining companies that are listed and publicly traded within the U.S. This is a more indirect type of investment in gold, and has a lot more risk and potential profit than gold coins. Investors are buying ownership of the mining company and therefore they receive a stake in the gold reserves held by the entity.
Since mining has mostly fixed costs, mining companies earn more profit when the cost of gold is higher. These companies range from those with market caps, or total market value of outstanding shares, of under 50 million dollars to those with more than ten billion dollars in market cap. Some gold stocks pay dividends, a portion of company earnings, to shareholders. This provides shareholders with a steady stream of income even when the company is not growing and therefore its stock price is not increasing. Of course, the dividends won’t be high – they’re very rarely higher than 2%.
Cash dividends can be reinvested in the company through the purchase of additional shares of stock. This allows for compounding of returns on the initial dividends. In addition, the stock earns value when the share price increases. Investors buy a fixed dollar amount of shares, equivalent to the dollar amount of dividends they received. They can purchase more shares when stock prices are low and fewer shares when stock prices are higher. In this way, they benefit from the theory of dollar cost averaging.
If you’re a novice investor, I must say you should stay away from picking gold stocks. They’re extremely complicated — more so than traditional stocks. If you want to profit from increasing gold costs, then buy gold. If you want dividend income from stocks, then buy other, more secure and stable stocks.
If you simply must have gold stocks in your portfolio, and are willing to take on extra risk for potential extra profits, then you might consider a gold mutual fund.
Next Part: Gold Mutual Funds