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Eight Stock Investment Opportunities and Challenges

Stock investing doesn't happen in a vacuum; it operates in a world swirling with issues and events that affect your stocks and stock investing decisions. Fortunately, it can still be profitable if you see clearly what the stock market faces today.

Events and conditions in today's economic and social landscape will either help or hurt your stock picks. Here are eight things to watch out for.

Debt

We are living in the age of overindebtedness. For stock investors, the point is loud and clear: If a company is too overindebted or has customers that are overindebted, the risk to the economic health of that company becomes obvious. If you invest in a stock that's exposed to debt problems, directly or indirectly, you'll be at risk.

Take a close look at the company's financials and ask yourself how exposed the company is to excessive debt. Too much debt means too much risk for its stock. Look elsewhere for potential investments because there are plenty of stocks with low (or controllable) levels of debt.

Inflation

Inflation is related to debt, especially government debt. When governments spend beyond their means, they go into debt (like the rest of us). However, when push comes to shove, they, unlike us, can print more money to pay this debt. Most governments that produce their own currency tend to overproduce money, and when you have too much money chasing too few goods and services, you get inflation.

Given this reality, it's important to keep some things in your portfolio that benefit from inflation, such as gold- and silver-related stocks, exchange-traded funds (ETFs), and energy and grain companies.

The growth of government

When you invest in stocks, you invest in companies. These companies, along with their customers and investors, are producers in the private economy. The private economy, in turn, supports government — its programs, public sector employees, dependents, and so on. From a functional point of view, the government is a burden that must be carried by the private sector. This is neither a negative nor positive point; it's just a reality.

The private sector has been able to shoulder the government and its related programs for decades, and it has generally worked well. However, the growth has crossed a troublesome line. The federal government's debt recently exceeded 100 percent of the country's gross domestic product (GDP) and has grown dramatically in recent years. Additionally, the federal annual budget (in terms of outlays or spending) is now greater than 28 percent of the country's GDP, the highest level in half a century.

History tells us that this type of development is unsustainable and that it can have profound and troubling effects on the private sector. (Translation: the stock market goes down.) What's an investor to do?

Investing in quality stocks is part of an overall, long-term wealth-building strategy, but along the way, and especially during perilous times, prudent safeguards, such as stop-loss orders, should be used.

International challenges

The world economy is getting more unstable. Financial crises, government mismanagement, and regional conflicts around the globe will ultimately affect your stock portfolio. Given that, stock investors are more apt to push the panic button when the headlines scream doom. Therefore, check to see to what extent a company you're thinking of investing in is dependent on those troubled lands.

Investing in a company that does business internationally isn't a bad thing; it can be good because it shows that the company makes money in a diversified range of countries. But it's a good idea to contact the company's shareholder department or visit its website to see what exposure (if any) it may have to the world's trouble spots. Of course, if the company does business with a country or region that's generally stable politically and economically, that's a plus.

Recession/Depression

As this article is published, various sources have pointed out that the United States is in a very slow recovery in the wake of the worst recession in decades. In addition, still more sources are warning that it's in danger of relapsing into a second recession (the so-called "double-dip recession"). Regardless of how you look at it, the economy is having its toughest time in modern history. What's an investor to do?

"Human need" investing — investing in those resources people will need regardless of the economy — should be the cornerstone of your investing, especially in tough times. No matter how good or bad times are, people will continue to buy what they need from the companies that fill their needs.

Technology

One great thing about the United States is that it still has a vibrant technology sector. Technology just makes some of our social and business activities that much more productive or enjoyable. No matter how bad the economy is, people will use their technology to ease the pain.

Technology is best broken up into two categories: technology that fills "wants" and technology that fills "needs." Even though "wants" seem to have done very well (just ask Apple devotees), investors should stick to technology that people and businesses need, such as technology for data storage, accounting, and telecommunications. Your common sense, coupled with research, will help you.

Commodities

In 2011, the world population crossed the 7 billion mark. That's a lot of people to feed, clothe, and shelter. All of these people need more of what can be summarized in one word: commodities (or natural resources). Commodities include corn, soybeans, cotton, cocoa, rice, copper, zinc, and so much more. Stocks (and related ETFs) of profitable companies that provide and prepare commodities for general consumption will do well, and investors should participate.

Energy

Energy has morphed into both a challenge and an opportunity. Energy as we have known it for decades — oil — is indeed running toward empty. Specifically, our economy has been running on sweet crude for a century or more. But oil supplies have been more and more difficult to come by. The days are numbered for this type of energy investment.

Fortunately, new opportunities are opening up. New technologies are helping the country find new energy supplies (such as natural gas and shale oil), and this is a very encouraging area for investors to research for new stock opportunities.

Energy will always be a vital part of a modern economy, no matter what form it may take. Energy is a necessity for businesses and consumers, and it belongs to some extent in almost any portfolio.

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