Stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy.
What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies. That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth.
Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1,000,000 shares outstanding has a lesser value than a company that trades at $50 but has 5,000,000 shares outstanding ($100 x 1,000,000 = $100,000,000 while $50 x 5,000,000 = $250,000,000).
To further complicate things, the price of a stock doesn't only reflect a company's current value--it also reflects the growth that investors expect in the future. The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, they aren't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).
Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall. Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price).
It would be a rather simple world if this were the case! During the dot-com bubble, for example, dozens of Internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most all Internet companies saw their values shrink to a fraction of their highs.
Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the P/E ratio, while others are extremely complicated and obscure with names like Chaikin Oscillator or Moving Average Convergence Divergence (MACD).
Monday, July 21, 2008
Market Trends - Bulls, Bears, Rallies, and Corrections
History has proven that investing in stocks yields more profits than most other investments. When an investor has money to invest, he needs to understand what the experts or analysts mean when they say bull market, bear market, or a correction. Understanding the meanings of different market trend expressions helps to plan personal strategies.
Paying attention to general market ups and downs produces better opportunities for the average investor and eliminates the risks of panicking when the stocks take a downward direction. Technical analyses of markets show that markets, in general, move in trends. Primary market trends are bull markets and bear markets. Secondary market trends are rallies and corrections.
When the buying of stocks outnumber their selling consistently, the market during that period of time is called a bull market. Also, investors or analysts who are optimistic on the markets' performances are said to be bullish. An analyst may be bullish on one sector like the oil stocks and not so on technology stocks or he may be bullish on the general direction of all markets. A rise in the markets over a short time like a few days is called a bull market rally.
A bear market happens when the general markets show a sizeable drop over a long period of time; that is more than a few months. This may mean the investor confidence is broken and the selling is much more than the buying of stocks. After the Great Depression, a bear market lasted for two years, resulting in high unemployment.
Analysts and investors who become pessimistic and think that the markets indicate a falling trend are said to be bearish. A sudden drop in the markets over a short term is called a bear market rally.
Bear market rallies come about abruptly and may cause panic among the investors. If the panic and pessimism continues, this may lead to recession, which means a significant decline in the economic activity of an entire nation. This behavior of the investors may cause a general market crash, like the one in 1929 that led to the Great Depression with an international outcome. The 1929 Market Crash came about when the bull market that started in 1920 came to an end.
The international crash or the panic selling in 1987, called the Black Monday Crash, however, did not happen because of recession. Although no one is sure why it happened, it started after the falling of the US dollar and trade deficits.
A correction is quite different than a crash, because it takes place after a bull run and lasts for a short time. The drop is more than 10%, but less than 25%. The correction in the markets is an opportunity for the savvy investor to buy stocks at a lower price. On the other hand, thinking that a bear market is only a correction can lead to disappointment.
When a market trend stays over a longer period of time measurable in years, it is said to be secular. Secular bear markets take the prices of the stocks to even lower levels than when the bull markets started.
No reliable method exists to forecast the market trends before they happen. Analysts and economists draw fancy charts and try to connect the trends to one reason or another such as the value of dollar, world events, or politics; however, none of the predictors has been consistently correct.
The best way for an investor is to keep his average losses down and gains high with an eye on the markets' moves. In the long run, stocks provide a good place to invest, despite the wild swings in the markets.
click here for more
Paying attention to general market ups and downs produces better opportunities for the average investor and eliminates the risks of panicking when the stocks take a downward direction. Technical analyses of markets show that markets, in general, move in trends. Primary market trends are bull markets and bear markets. Secondary market trends are rallies and corrections.
When the buying of stocks outnumber their selling consistently, the market during that period of time is called a bull market. Also, investors or analysts who are optimistic on the markets' performances are said to be bullish. An analyst may be bullish on one sector like the oil stocks and not so on technology stocks or he may be bullish on the general direction of all markets. A rise in the markets over a short time like a few days is called a bull market rally.
A bear market happens when the general markets show a sizeable drop over a long period of time; that is more than a few months. This may mean the investor confidence is broken and the selling is much more than the buying of stocks. After the Great Depression, a bear market lasted for two years, resulting in high unemployment.
Analysts and investors who become pessimistic and think that the markets indicate a falling trend are said to be bearish. A sudden drop in the markets over a short term is called a bear market rally.
Bear market rallies come about abruptly and may cause panic among the investors. If the panic and pessimism continues, this may lead to recession, which means a significant decline in the economic activity of an entire nation. This behavior of the investors may cause a general market crash, like the one in 1929 that led to the Great Depression with an international outcome. The 1929 Market Crash came about when the bull market that started in 1920 came to an end.
The international crash or the panic selling in 1987, called the Black Monday Crash, however, did not happen because of recession. Although no one is sure why it happened, it started after the falling of the US dollar and trade deficits.
A correction is quite different than a crash, because it takes place after a bull run and lasts for a short time. The drop is more than 10%, but less than 25%. The correction in the markets is an opportunity for the savvy investor to buy stocks at a lower price. On the other hand, thinking that a bear market is only a correction can lead to disappointment.
When a market trend stays over a longer period of time measurable in years, it is said to be secular. Secular bear markets take the prices of the stocks to even lower levels than when the bull markets started.
No reliable method exists to forecast the market trends before they happen. Analysts and economists draw fancy charts and try to connect the trends to one reason or another such as the value of dollar, world events, or politics; however, none of the predictors has been consistently correct.
The best way for an investor is to keep his average losses down and gains high with an eye on the markets' moves. In the long run, stocks provide a good place to invest, despite the wild swings in the markets.
click here for more
Saturday, July 19, 2008
The Top 10 Trading Rules Experts Recommend for stock trading
With all the risk encountered on the stock market, it helps to have a set of guidelines to follow for making your overall trading decisions. While each expert has their own ideas of which rules are the most important to follow, here are some that usually come up among the top 10 trading rules.
Have a strategy and stick to it
Before you get started trading, do some critical research on a variety of different trading strategies and choose the one that best fits your financial goals and personal style. Then stick with that strategy. All of them can bring in profits, but not if you keep jumping from one to another.
Follow the trend
Don't try to buck the trend. For many traders this is easier said than done. Most people involved in stock trading are more independent minded than average and have a natural tendency to avoid doing what everyone else is doing. For the sake of your profits, try to rein that tendency in a little.
Know when to cut your losses
This is another often heard piece of trading advice that's hot so easy to follow. None of us like to admit we've made a mistake and simple hope keeps many traders holding onto a falling stock waiting for things to turn around. Before you enter a trade, decide your stop loss price so you'll know exactly when to sell.
Don't overtrade
Try to stick to 3 to 5 positions you know well and are satisfied with. Any more and you're likely to start losing control and making unsound decisions.
Manage your risk
Before you even start trading for the day, choose your objectives, entry points, and exit points to avoid any rash decisions. Never risk more than 5% of your account on one trade. Also make sure you always have stop-loss and take-profit orders in place.
Do your research
Before you buy stock in a company learn as much as you can about it and where it's headed. That means more than just looking up its stock symbol. Dig into information on how the company is run, their objectives, and what their customers think about them.
Be flexible
While sticking to a strategy is important, the stock market is highly dynamic place and it's bound to surprise you with sudden shifts from time to time. Accept this and be ready to change your decisions when needed.
Beware of your emotions
If you're tired, grumpy, or even overly optimistic, take the day off. Same goes if you're not feeling well. A mistake caused by emotions or plain tiredness could cost you thousands, which won't do anything for your mood or your health.
Question everything
Even the writers and editors at the top trading magazines and newsletters make mistakes. They may have a lot more time to analyze stocks than you, but no analysis system is perfect, especially when used by imperfect human beings. It's fine and, in fact, usually profitable to take cues from the experts, but you owe it to yourself to verify any information and tips you get before you invest.
Unfortunately, there's no one set of rules that will guarantee success on the stock market, but by using the top 10 trading rules set out here as guidelines, you're bound to improve your results.
click here for more
Have a strategy and stick to it
Before you get started trading, do some critical research on a variety of different trading strategies and choose the one that best fits your financial goals and personal style. Then stick with that strategy. All of them can bring in profits, but not if you keep jumping from one to another.
Follow the trend
Don't try to buck the trend. For many traders this is easier said than done. Most people involved in stock trading are more independent minded than average and have a natural tendency to avoid doing what everyone else is doing. For the sake of your profits, try to rein that tendency in a little.
Know when to cut your losses
This is another often heard piece of trading advice that's hot so easy to follow. None of us like to admit we've made a mistake and simple hope keeps many traders holding onto a falling stock waiting for things to turn around. Before you enter a trade, decide your stop loss price so you'll know exactly when to sell.
Don't overtrade
Try to stick to 3 to 5 positions you know well and are satisfied with. Any more and you're likely to start losing control and making unsound decisions.
Manage your risk
Before you even start trading for the day, choose your objectives, entry points, and exit points to avoid any rash decisions. Never risk more than 5% of your account on one trade. Also make sure you always have stop-loss and take-profit orders in place.
Do your research
Before you buy stock in a company learn as much as you can about it and where it's headed. That means more than just looking up its stock symbol. Dig into information on how the company is run, their objectives, and what their customers think about them.
Be flexible
While sticking to a strategy is important, the stock market is highly dynamic place and it's bound to surprise you with sudden shifts from time to time. Accept this and be ready to change your decisions when needed.
Beware of your emotions
If you're tired, grumpy, or even overly optimistic, take the day off. Same goes if you're not feeling well. A mistake caused by emotions or plain tiredness could cost you thousands, which won't do anything for your mood or your health.
Question everything
Even the writers and editors at the top trading magazines and newsletters make mistakes. They may have a lot more time to analyze stocks than you, but no analysis system is perfect, especially when used by imperfect human beings. It's fine and, in fact, usually profitable to take cues from the experts, but you owe it to yourself to verify any information and tips you get before you invest.
Unfortunately, there's no one set of rules that will guarantee success on the stock market, but by using the top 10 trading rules set out here as guidelines, you're bound to improve your results.
click here for more
Wednesday, July 16, 2008
Buying Penny Stocks...Is It Worth It?
Small-cap investing can be difficult sometimes. Wall Street shuns it, mainstream media ignore it, and most investors are scared of it. Why is this?
First of all, everyone has heard the stories about someone losing of all his or her money through those "risky penny stocks." But everyone has also read the stories about someone striking it rich with just one tiny investment in those "lucrative penny stocks." Frankly, both stories are true. But one is actually truer than the other...
The Risks and Rewards of Penny Stocks
To simply shun penny stocks - as many on Wall Street do - is a mistake. I can give you one simple stat to prove it.
In a famous Tweedy, Browne report back in 1983, every publicly traded U.S. stock was grouped by size. As you can see below, the smallest groups fared the best...
Tiny Stocks Beat up on Their Large Counterparts source: Tweedy, Browne's What Has Worked in Investing
As the size of the companies in each group gets larger, the returns are smaller. Obviously, those who invested in small companies over the period of 1963-1980 did quite well. You could say small caps offer a higher reward than their larger counterparts. But that doesn't say anything about the risk.
You see, without understanding the risks, blindly investing in penny stocks is dangerous. You can't expect every 10 cent stock to jump to $10. Occasionally, companies run out of money or the patent becomes obsolete. There are a billion reasons for penny stocks to fall apart, but for every one of those, there are 10 reasons for buying.
Sure, if you buy three, you might have one go bankrupt and one that doesn't move in price, but one could shoot up a few thousand percent. That's the real risk-to-reward we look for when dealing with penny stocks. We've seen tons of our picks shoot from just a few cents into the $10-20 range. Believe me - it's worth it when that happens...
Sincerely,
Access int.
First of all, everyone has heard the stories about someone losing of all his or her money through those "risky penny stocks." But everyone has also read the stories about someone striking it rich with just one tiny investment in those "lucrative penny stocks." Frankly, both stories are true. But one is actually truer than the other...
The Risks and Rewards of Penny Stocks
To simply shun penny stocks - as many on Wall Street do - is a mistake. I can give you one simple stat to prove it.
In a famous Tweedy, Browne report back in 1983, every publicly traded U.S. stock was grouped by size. As you can see below, the smallest groups fared the best...
Tiny Stocks Beat up on Their Large Counterparts source: Tweedy, Browne's What Has Worked in Investing
As the size of the companies in each group gets larger, the returns are smaller. Obviously, those who invested in small companies over the period of 1963-1980 did quite well. You could say small caps offer a higher reward than their larger counterparts. But that doesn't say anything about the risk.
You see, without understanding the risks, blindly investing in penny stocks is dangerous. You can't expect every 10 cent stock to jump to $10. Occasionally, companies run out of money or the patent becomes obsolete. There are a billion reasons for penny stocks to fall apart, but for every one of those, there are 10 reasons for buying.
Sure, if you buy three, you might have one go bankrupt and one that doesn't move in price, but one could shoot up a few thousand percent. That's the real risk-to-reward we look for when dealing with penny stocks. We've seen tons of our picks shoot from just a few cents into the $10-20 range. Believe me - it's worth it when that happens...
Sincerely,
Access int.
Monday, July 14, 2008
ADVANCE STOCK TIPS
Digging Deeper Into Bull and Bear Markets
Almost everyday in the investing world, you will hear the terms "bull" and "bear" to describe market conditions. As common as these terms are, however, defining and understanding what they mean is not so easy. Because the direction of the market is a major force affecting your portfolio, it's important you know exactly what the terms bull and bear market actually signify, how they are characterized and how each affects you.
What Are Bear and Bull Markets?Used to describe how stock markets are doing in general - that is, whether they are appreciating or depreciating in value - these two terms are constantly buzzing around the investing world. At the same time, since the market is determined by investors' attitudes, these terms also denote how investors feel about the market and the ensuing trend.Simply put, a bull market refers to a market that is on the rise. It is typified by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long term. Typically, the country's economy is strong and employment levels are high. On the other hand, a bear market is one that is in decline. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue in the long run, which, in turn, perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.Where Did the Terms Come From?Well, the origins of these two terms are unclear, but here are two of the most common explanations:
1. The bear and bull markets are named after the way in which each animal attacks its victims. It is characteristic of the bull to drive its horns up into the air, while a bear, on the other hand, like the market that is named after it, will swipe its paws downwards upon its unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents when it was popular to put bulls and bears into the arena for a fight match.
2. Historically, the middlemen who were involved in the sale of bearskins would sell skins that they had not yet received, and, as such, these middlemen were the first short sellers. After promising their customers to deliver the paid-for bearskins, these middlemen would hope that the near-future purchase price of the skins from the trappers would decrease from the current market price. If the decrease occurred, the middlemen would make a personal profit from the spread between the price for which they had sold the skins and the price at which they later bought the skins from the trappers. These middlemen became known as bears, short for "bearskin jobbers", and the term stuck for describing a person who expects or hopes for a decrease in the market.
Characteristics of a Bull and Bear MarketAlthough we know that a bull or bear market condition is marked by the direction of stock prices, there are some accompanying characteristics of the bull and bear markets that investors should be aware of. The following list describes some of the factors that generally are affected by the current market type, but do keep in mind that these are not steadfast or absolute rules for typifying either bull or bear markets:
Supply and demand for securities - In a bull market, we see strong demand and weak supply for securities. In other words, many investors are be wishing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available equity. In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply, and, as a result, share prices drop.
Investor psychology - Since the market's behavior is impacted and determined by how individuals perceive that behavior, investor psychology and sentiment are fundamental to whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, most everyone is interested in the market, willingly participating in hopes of obtaining a profit. During a bear market, on the other hand, market sentiment is negative as investors are beginning to move their money out of equities and waiting in fixed-income securities until there is a positive move. In sum, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market - which, in turn, causes the decline in the stock market.
Change in economic activity - Since the businesses whose stocks are trading on the exchanges are the participants of the greater economy, the stock market and the economy are strongly connected. A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market valuates stocks. In a bull market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.
STOCK MARKET ANALYSIS
INTRODUCTION
Over the years the rich have build, grown and consolidated their wealth through the use of their fiscal power while the poor have only wondered how the rich have continue to grow richer by the day. The difference is obvious, the rich don’t just work for money, and they also make their money work harder than they do. Money is a good servant that can work for 24 hours and because of this the rich makes money while they are sleeping! This is why no matter how much the poor man exerts in physical labor he cannot measure up to the rich in wealth and affluence, until he learns the wisdom of putting ones money to work.
There is a limit to the level of success hard work can procure. Where hard work stops is where leverage begins. Leverage helps a person to achieve more with less. It was Archimedes who said,” Give me a lever and I will move the world” With enough financial leverage, even the poor can move the financial world in their favor. Making money to work is one of the leverage the rich have used over the years to shake the financial world. If the poor can learn too, how to work more with their fiscal power than their physical power, they too can become rich in no time.
One of the ways the rich put their money to work is by investing in the stock market. The stock market over the years represents a goldmine of opportunities for those who are well informed about it. But unfortunately in this part of the world, despite the Nigerian stock market being one of the emerging markets in the world, many Nigerians don’t yet know how to invest intelligibly in the stock market. If Nigerians today knows a little bit about the stock market, then all thanks most go to the recent banking capitalization exercise. Except for this many NIGERIANS HAVE NOT EVEN HEARD THE WORD ‘SHARES’ BEFORE. Statistics shows that less than 10% of Nigerians invest in the stock market, this is low compared to empower and developed nations like America that has over 60% of its population actively investing stock market.
This handout will show you how to make money like the rich, by showing you what investment is all about, but with special emphasis on the stock market. However, before we go fully into the world of stock market invest; let us first understand the concept of investing and what it takes to be a successful investor.
WHAT IS INVESTMENT?
Before defining what investment is, let us understand first, some basic truths about investment.
Life is all about investment – There is an investment process that keeps life going. Life will cease when everything that makes it function cease to invest. Plants will die if it refuses to give up oxygen for man’s use. Equally, Man will die if it refuses to give up Carbon dioxide for plants use. The exchange of oxygen and carbon dioxide between plants and animals is what keeps life going. In real life investment, there is always an exchange of something good for something better. It is this exchange that we call investment.
All of us are investors, we only invest in different things – Why do we go to school? Why invest so many years in learning? We invest our time and energy in learning and acquiring education believing that our investment in education will give us a better life. Some invest in big families with the hope that there numerous children will take care of their financial future. Everyone basically understands what investment is al about, that is letting of something good for something better, even though we don’t invest in the same way and in the same thing.
INVESTMENT DEFINED
The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
It’s actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day we can work, not to mention the fact that having a bunch of money is no fun if we don't have the leisure time to enjoy it You can't create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money - to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job. There are many different ways you can go about making an investment. This includes putting money into stocks, bonds or real estate (among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest." Each of these vehicles has positives and negatives, which we'll discuss in a later section of this tutorial. The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it's the most important concept for you to understand. What Investing Is Not Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino. True investing doesn't happen without some action on your part. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side.
Investing is also different from saving. Saving is about keeping what you have while investing is using what you have to get what you need. Saving is a defensive strategy while investing is an offensive strategy and profitable investors are always on the offensive.
WHY BOTHER INVESTING?
Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.Whether you live in Nigeria , the U.S, Canada , or pretty much any other country in the world, governments are tightening their belts. Almost without exception, the responsibility of planning for retirement is shifting away from the state and towards the individual. Investment offers the opportunity for individuals to plan their financial future without leaving it to chance or government that are fast becoming undependable. In summary investing does the following
· Helps individuals to maximize their earning power while they are still working
· Guarantees security of tomorrow
· Preserves your earning power when you can no longer work as your money continues to work for you.
· Investment makes rich
SUCCESSFUL INVESTING
The key to successful investing is to become a successful investor. As it is in the investment world, the key to success is not determined by the investment vehicle but by the investor. The investor determines the success of is investment. Skills determine success. To become a good at investing an individual must possess the following three E’S of successful investing as identified by Robert Kiyosaki.
· EDUCATION – The word education here means financial education. It is the shortest distance between wealth and poverty. Proper education about the investment world does two things for the investor, it reduces risk and makes the investor skillful. The risk attached to investing is greatly reduced when the investor is well informed. This is why a prospective investor must spend time in learning before committing money to any kind of investment.
· EXPERIENCE – Experience comes via exposure. Limited exposure translates to limited experience. It is by making moves and making mistakes and learning along the way that we gain experience and become smart.
· EXCESSIVE CASH – Excessive cash comes via using both your education and experience overtime. The more money you make from investment the more risky investment you can take on. And the more risky investment you take on, the more money you can make.
We cannot cover all that is needed to become skilled at investing in this handout, but the basics provides a platform to launch from ,learn more and achieve more. Now we focus on the stock market.
WHY STOCKS?
There are different options open to an investor to invest is money. Of these different investment vehicles we have chosen to focus on stocks because of the following reasons.
1. Everyone plays the stock market – You may be aware of this fact or not, but every body plays the stock market. The entrepreneur or the businessman plays the stock Market by raising funds from the market to expand their business activities. An investor plays the market by investing in businesses that raise funds from the market and thereby partakes of its profits. Others play the stock market either by working for companies that are quoted on the stock exchange or by buying the products of these companies. As an outsider, a consumer of the products of the companies that are in the stock market, each time you buy any of there products you are simply making others rich. The producers in the economy are the entrepreneurs and the investors, while the consumers are those who buy the products made by these people. The consumer makes the producer rich.
2. An instrument for wealth creation - The three basic things people invest their money in includes shares, bonds and money markets products like savings or fixed deposits. Stock, as you will understand later, represents ownership. Bonds and savings represent ‘loanership’. Whatever you put in the bank is loaned out by the banks to other people to create wealth. When you loan your money is borrowed by owners who are using your money to create wealth for themselves. But when you own by buying shares you create wealth for yourself.
3. The perfect investment – The perfect investment by my definition is an investment that requires less effort to produce results. The perfect investment is also the investment that does not require your physical presence to make money. The perfect investment creates wealth without sweat. Investment in stocks meets this requirement. Your physical presence is not required to make money; only your fiscal power is needed.
4. It is the investment of the rich – All the richest people in the world plays the stock market one way or the other.
5. You don’t require big capital – investing in the stock market does not require much capital to start. For as low as a thousand naira you can start investing in stocks. This however depends on the stock broking firm you are using.
6. The Nigerian stock market - Given the beautiful performances recorded by the Nigerian stock market in recent years which has now place it among the best emerging stock market in the world, investing in stocks cannot come at a better time than this.
WHAT ARE STOCKS?
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company’s asset and earnings. As you acquire more stocks, your ownership share in the company becomes greater. There are two kinds of companies.
QUOTED AND UNQUOTED COMPANIES
Quoted companies: These are companies that their securities are available to existing and potential investors. For example are Nestle, Cadbury, NBC, and others. Presently there are over 20 companies quoted on the Nigerian stock Exchange. The shares of these companies are available for ownership interest by the public.
Unquoted companies: These are private companies whose securities are not listed on the stock exchange. Unquoted companies have private arrangements of selling their own shares and most of the time cannot be easily accessible by the investing public.
For an average individual, acquiring the stock of a publicly quoted company is much easier. Now imagine this, without having more than an average educational background, very little management training, without being an entrepreneur, without owning a company premises, and with as little as a thousand naira you can become one of the proud owners of a multinational company by buying their shares.
BEING AN OWNER
Holding a company’s stock means that you are one of the many owners called, shareholders. A shareholder is a person who has shares in a company. Any time you buy the shares of a particular company you become one f its numerous shareholders.
TYPES OF STOCKS
There are two main types of stocks: common stock and preferred stock.
Common Stock Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Preferred Stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.
HOW STOCKS TRADE
Stocks are traded on the stock exchange, which is a place where buyers and sellers meet and decide on a price. The major trading floor of the Nigerian Stock Exchange is in Lagos . There are two ways to access the stock market and buy shares.
PRIMARY MARKET-This is where securities or shares are created and made available through an instrument called the IPO. The term IPO means Initial Public Offering. An IPO is an invitation, usually the first, to the general public to partake in the share holding status of a company by buying the shares offered by the company. Many banks in the last few years have come to the stock market, issue IPO’s to raise funds for its recapitalization effort. After a company’s IPO is successful its shares are now listed on the stock exchange, which is the secondary market.
SECONDARY MARKET- this is often the place people refer to when they are talking about the stock market. In the secondary market shares of quoted companies are traded everyday from Monday to Friday. Most IPO’s can be purchased from banks or other places so announced by the company issuing the stock, but buying stock on the Nigerian stock exchange will require the service of a stock broker.
Over the years the rich have build, grown and consolidated their wealth through the use of their fiscal power while the poor have only wondered how the rich have continue to grow richer by the day. The difference is obvious, the rich don’t just work for money, and they also make their money work harder than they do. Money is a good servant that can work for 24 hours and because of this the rich makes money while they are sleeping! This is why no matter how much the poor man exerts in physical labor he cannot measure up to the rich in wealth and affluence, until he learns the wisdom of putting ones money to work.
There is a limit to the level of success hard work can procure. Where hard work stops is where leverage begins. Leverage helps a person to achieve more with less. It was Archimedes who said,” Give me a lever and I will move the world” With enough financial leverage, even the poor can move the financial world in their favor. Making money to work is one of the leverage the rich have used over the years to shake the financial world. If the poor can learn too, how to work more with their fiscal power than their physical power, they too can become rich in no time.
One of the ways the rich put their money to work is by investing in the stock market. The stock market over the years represents a goldmine of opportunities for those who are well informed about it. But unfortunately in this part of the world, despite the Nigerian stock market being one of the emerging markets in the world, many Nigerians don’t yet know how to invest intelligibly in the stock market. If Nigerians today knows a little bit about the stock market, then all thanks most go to the recent banking capitalization exercise. Except for this many NIGERIANS HAVE NOT EVEN HEARD THE WORD ‘SHARES’ BEFORE. Statistics shows that less than 10% of Nigerians invest in the stock market, this is low compared to empower and developed nations like America that has over 60% of its population actively investing stock market.
This handout will show you how to make money like the rich, by showing you what investment is all about, but with special emphasis on the stock market. However, before we go fully into the world of stock market invest; let us first understand the concept of investing and what it takes to be a successful investor.
WHAT IS INVESTMENT?
Before defining what investment is, let us understand first, some basic truths about investment.
Life is all about investment – There is an investment process that keeps life going. Life will cease when everything that makes it function cease to invest. Plants will die if it refuses to give up oxygen for man’s use. Equally, Man will die if it refuses to give up Carbon dioxide for plants use. The exchange of oxygen and carbon dioxide between plants and animals is what keeps life going. In real life investment, there is always an exchange of something good for something better. It is this exchange that we call investment.
All of us are investors, we only invest in different things – Why do we go to school? Why invest so many years in learning? We invest our time and energy in learning and acquiring education believing that our investment in education will give us a better life. Some invest in big families with the hope that there numerous children will take care of their financial future. Everyone basically understands what investment is al about, that is letting of something good for something better, even though we don’t invest in the same way and in the same thing.
INVESTMENT DEFINED
The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
It’s actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day we can work, not to mention the fact that having a bunch of money is no fun if we don't have the leisure time to enjoy it You can't create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money - to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job. There are many different ways you can go about making an investment. This includes putting money into stocks, bonds or real estate (among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest." Each of these vehicles has positives and negatives, which we'll discuss in a later section of this tutorial. The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it's the most important concept for you to understand. What Investing Is Not Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino. True investing doesn't happen without some action on your part. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side.
Investing is also different from saving. Saving is about keeping what you have while investing is using what you have to get what you need. Saving is a defensive strategy while investing is an offensive strategy and profitable investors are always on the offensive.
WHY BOTHER INVESTING?
Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.Whether you live in Nigeria , the U.S, Canada , or pretty much any other country in the world, governments are tightening their belts. Almost without exception, the responsibility of planning for retirement is shifting away from the state and towards the individual. Investment offers the opportunity for individuals to plan their financial future without leaving it to chance or government that are fast becoming undependable. In summary investing does the following
· Helps individuals to maximize their earning power while they are still working
· Guarantees security of tomorrow
· Preserves your earning power when you can no longer work as your money continues to work for you.
· Investment makes rich
SUCCESSFUL INVESTING
The key to successful investing is to become a successful investor. As it is in the investment world, the key to success is not determined by the investment vehicle but by the investor. The investor determines the success of is investment. Skills determine success. To become a good at investing an individual must possess the following three E’S of successful investing as identified by Robert Kiyosaki.
· EDUCATION – The word education here means financial education. It is the shortest distance between wealth and poverty. Proper education about the investment world does two things for the investor, it reduces risk and makes the investor skillful. The risk attached to investing is greatly reduced when the investor is well informed. This is why a prospective investor must spend time in learning before committing money to any kind of investment.
· EXPERIENCE – Experience comes via exposure. Limited exposure translates to limited experience. It is by making moves and making mistakes and learning along the way that we gain experience and become smart.
· EXCESSIVE CASH – Excessive cash comes via using both your education and experience overtime. The more money you make from investment the more risky investment you can take on. And the more risky investment you take on, the more money you can make.
We cannot cover all that is needed to become skilled at investing in this handout, but the basics provides a platform to launch from ,learn more and achieve more. Now we focus on the stock market.
WHY STOCKS?
There are different options open to an investor to invest is money. Of these different investment vehicles we have chosen to focus on stocks because of the following reasons.
1. Everyone plays the stock market – You may be aware of this fact or not, but every body plays the stock market. The entrepreneur or the businessman plays the stock Market by raising funds from the market to expand their business activities. An investor plays the market by investing in businesses that raise funds from the market and thereby partakes of its profits. Others play the stock market either by working for companies that are quoted on the stock exchange or by buying the products of these companies. As an outsider, a consumer of the products of the companies that are in the stock market, each time you buy any of there products you are simply making others rich. The producers in the economy are the entrepreneurs and the investors, while the consumers are those who buy the products made by these people. The consumer makes the producer rich.
2. An instrument for wealth creation - The three basic things people invest their money in includes shares, bonds and money markets products like savings or fixed deposits. Stock, as you will understand later, represents ownership. Bonds and savings represent ‘loanership’. Whatever you put in the bank is loaned out by the banks to other people to create wealth. When you loan your money is borrowed by owners who are using your money to create wealth for themselves. But when you own by buying shares you create wealth for yourself.
3. The perfect investment – The perfect investment by my definition is an investment that requires less effort to produce results. The perfect investment is also the investment that does not require your physical presence to make money. The perfect investment creates wealth without sweat. Investment in stocks meets this requirement. Your physical presence is not required to make money; only your fiscal power is needed.
4. It is the investment of the rich – All the richest people in the world plays the stock market one way or the other.
5. You don’t require big capital – investing in the stock market does not require much capital to start. For as low as a thousand naira you can start investing in stocks. This however depends on the stock broking firm you are using.
6. The Nigerian stock market - Given the beautiful performances recorded by the Nigerian stock market in recent years which has now place it among the best emerging stock market in the world, investing in stocks cannot come at a better time than this.
WHAT ARE STOCKS?
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company’s asset and earnings. As you acquire more stocks, your ownership share in the company becomes greater. There are two kinds of companies.
QUOTED AND UNQUOTED COMPANIES
Quoted companies: These are companies that their securities are available to existing and potential investors. For example are Nestle, Cadbury, NBC, and others. Presently there are over 20 companies quoted on the Nigerian stock Exchange. The shares of these companies are available for ownership interest by the public.
Unquoted companies: These are private companies whose securities are not listed on the stock exchange. Unquoted companies have private arrangements of selling their own shares and most of the time cannot be easily accessible by the investing public.
For an average individual, acquiring the stock of a publicly quoted company is much easier. Now imagine this, without having more than an average educational background, very little management training, without being an entrepreneur, without owning a company premises, and with as little as a thousand naira you can become one of the proud owners of a multinational company by buying their shares.
BEING AN OWNER
Holding a company’s stock means that you are one of the many owners called, shareholders. A shareholder is a person who has shares in a company. Any time you buy the shares of a particular company you become one f its numerous shareholders.
TYPES OF STOCKS
There are two main types of stocks: common stock and preferred stock.
Common Stock Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Preferred Stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.
HOW STOCKS TRADE
Stocks are traded on the stock exchange, which is a place where buyers and sellers meet and decide on a price. The major trading floor of the Nigerian Stock Exchange is in Lagos . There are two ways to access the stock market and buy shares.
PRIMARY MARKET-This is where securities or shares are created and made available through an instrument called the IPO. The term IPO means Initial Public Offering. An IPO is an invitation, usually the first, to the general public to partake in the share holding status of a company by buying the shares offered by the company. Many banks in the last few years have come to the stock market, issue IPO’s to raise funds for its recapitalization effort. After a company’s IPO is successful its shares are now listed on the stock exchange, which is the secondary market.
SECONDARY MARKET- this is often the place people refer to when they are talking about the stock market. In the secondary market shares of quoted companies are traded everyday from Monday to Friday. Most IPO’s can be purchased from banks or other places so announced by the company issuing the stock, but buying stock on the Nigerian stock exchange will require the service of a stock broker.
Sunday, July 13, 2008
How To Survive the Bear Market At Any Age
It's scary, and it always is during a bear market because we cannot see the future.
We imagine losing everything. Some people flee during the worst of times -- locking in loses that might not be repaired for decades. Others simply freeze -- unable to figure out what to do. Most think that if they were just a little more savvy about the market they'd be able to examine the stock market and figure out what to do.
Forget such a notion. Even the pros can't see the future clearly.
What the pros do know is that eventually stocks recover. After the average bear market, the stock market surges 44 percent. So they try to position their clients to recover when the good times finally emerge. You can do this too, and it's not nearly as difficult as you might think.
Here's what to do:
Instead, respond to the following questions:
Do you have an emergency fund?
Money for an emergency should not be invested in the stock market. The rule of thumb is to invest no money in the stock market that you might need within about five years. Another rule of thumb: Always have three to six months' worth of cash in a high-yield savings account, money market fund or certificate of deposit, so you can get your hands on it quickly.
Do you have a child going to college soon?
If your child is in college or about to enter college, little of that money should be in stocks. You don't want your savings to disappear when the bursar's office is expecting a check. By the time your child is 13, consider dividing your money up half in stock and half in bond funds. At 16, you could follow the example used by T. Rowe Price in 529 college savings funds: Put only 34 percent into stocks, about 52 percent in bonds, and 14 percent in a money market fund. As your child begins college, have no more than 20 percent of your savings in stocks for the coming years. Are you saving for a house?If you expect to need a down payment within about five years, the money should be in money market funds, high-yield savings accounts and CDs. To find the best rates on savings accounts and CD's go to www.bankrate.com.
Are you retired? Conservative financial planners often keep only about 30 percent of a retiree's money in the stock market once they are in their 70s. Others might divide money up 50-50 in stocks and bonds. Some become more aggressive with stocks, but make sure retirees have five years' worth of living expenses in cash, CDs or short-term government bonds, so they don't have to sell stocks when it's a bad time to sell. For people on the verge of retirement, or just starting retirement, a common allocation is 60 percent in stock mutual funds and 40 percent bonds. A more conservative approach is 50:50 -- an approach that would be safer in a bear market. Cash -- or a money market fund -- can be a safer investment than a bond fund in times of inflation and rising interest rates. That's because bond funds drop in value when interest rates go up. Why? Bond funds are filled with bonds. When interest rates go up, people want to get as much interest as possible. So they like to buy new bonds with high interest rates. Old bonds -- or the ones already in a bond mutual fund -- drop in value because the old bonds have low interest rates that investors don't want. Think of it this way. Assume you have a bond fund filled with bonds paying 4 % interest. Now, new bonds come out paying 6 % interest. Why would investors want 4 %, when they can get 6 %. The bond fund will start buying the 6 % bonds, but meanwhile if they want to sell their 4 % bonds they will have to sell them at a loss. Investors worried about this can buy individual bonds or CDs and hold them until they mature. When you hold a bond, you don't lose money. Yet, realize that if a bond doesn't mature for many years, you could get stuck holding it -- and getting very little interest -- while inflation starts making your living costs go up. Interest rates rise with inflation, so if you think inflation is going to be a threat, don't lock all your money up in bonds that won't mature for several years.During nerve-wracking times when you are afraid of interest rates rising soon, you can park some money in a money market fund. You don't want to do this for a long time, however, because the 3 percent interest you might make isn't keeping you up with the cost of inflation.For more information for retirees, scroll down my blog to find "How Retirees Can Survive the Bear Market." It's under the category: "Survive the Bear Market."
Are you saving for retirement?
If you are many years from retirement, you will recover from this downturn in time. Cycles are painful, but are a natural part of investing. It has been rare for the stock market to remain down for more than five years, according to research by Ibbotson Associates. It has never been down for 15 years. So if you are years away from retiring, you are likely to enjoy the surge that eventually comes after every bear market. On average, after the bear market hits bottom, it surges 44 percent in a single year. Sometimes it's been more and sometimes less. Also, on average investors -- who keep their money in the stock market -- earn back what they lost in 2 1/2 years. When you see "stock market," realize I am talking about the full Standard & Poor's 500, or what you would get in the typical stock market "index fund" in a 401(k) plan. If you are picking individual stocks you are taking a bigger chance.
If you are a nervous investor you can try a portfolio that is 60 percent in stocks and 40 percent in bonds. You can often find such a mixture in a type of mutual fund called a "balanced fund."
Can you make your money safer?
When you combine stocks, bonds and cash (money market funds), you give your money a chance to recover from bear markets, and you insulate it somewhat during the worst periods. Think of bonds and cash as shock absorbers. Financial planners often suggest that people in their 30s and 40s select a 70-30 stocks-to-bonds combination. As people age, they should remove some money from stocks and put it in bonds. So by the time a person is in their 60s, they will have about 60 percent in stock funds and 40 percent in bond funds. If they are a cautious person, worried about the stock market, a 50-50 combination would be better.
Are you using a moderate approach?
Here's how you might divide your money in a moderate portfolio of mutual funds if you can convince yourself to stick with stocks for the long term, but are afraid to be too exposed to the stock market now: 40 percent in bonds, 39 percent in large-cap stock funds which invest in large companies, 6 percent in mid-cap stock funds which invest in medium size companies, 6 percent in small-cap stock funds, which invest in small companies, 9 percent international stock funds. This type of mixture is called "being diversified." If you are in a diversified portfolio and are scared, consider ratcheting back stocks by 5 percent or 10 percent, rather than fleeing altogether.
Can you start buying?
If you are saving for retirement and have a diversified portfolio, keep putting money into it. If the downturn in the stock market is too much for your to stomach, keep saving as much money as usual, but put it temporarily into a money market fund or stable value fund in a 401(k) or other retirement savings plan.
If you can force yourself to use a portfolio like I described above, you will be buying stocks at a price about 20 percent below where they were in early October. Think of it as shopping the sale rack. In a bear market there can always be more markdowns, but at least you know the price you pay today is a better deal than the price you paid while feeling safer in early 2007.
We imagine losing everything. Some people flee during the worst of times -- locking in loses that might not be repaired for decades. Others simply freeze -- unable to figure out what to do. Most think that if they were just a little more savvy about the market they'd be able to examine the stock market and figure out what to do.
Forget such a notion. Even the pros can't see the future clearly.
What the pros do know is that eventually stocks recover. After the average bear market, the stock market surges 44 percent. So they try to position their clients to recover when the good times finally emerge. You can do this too, and it's not nearly as difficult as you might think.
Here's what to do:
Instead, respond to the following questions:
Do you have an emergency fund?
Money for an emergency should not be invested in the stock market. The rule of thumb is to invest no money in the stock market that you might need within about five years. Another rule of thumb: Always have three to six months' worth of cash in a high-yield savings account, money market fund or certificate of deposit, so you can get your hands on it quickly.
Do you have a child going to college soon?
If your child is in college or about to enter college, little of that money should be in stocks. You don't want your savings to disappear when the bursar's office is expecting a check. By the time your child is 13, consider dividing your money up half in stock and half in bond funds. At 16, you could follow the example used by T. Rowe Price in 529 college savings funds: Put only 34 percent into stocks, about 52 percent in bonds, and 14 percent in a money market fund. As your child begins college, have no more than 20 percent of your savings in stocks for the coming years. Are you saving for a house?If you expect to need a down payment within about five years, the money should be in money market funds, high-yield savings accounts and CDs. To find the best rates on savings accounts and CD's go to www.bankrate.com.
Are you retired? Conservative financial planners often keep only about 30 percent of a retiree's money in the stock market once they are in their 70s. Others might divide money up 50-50 in stocks and bonds. Some become more aggressive with stocks, but make sure retirees have five years' worth of living expenses in cash, CDs or short-term government bonds, so they don't have to sell stocks when it's a bad time to sell. For people on the verge of retirement, or just starting retirement, a common allocation is 60 percent in stock mutual funds and 40 percent bonds. A more conservative approach is 50:50 -- an approach that would be safer in a bear market. Cash -- or a money market fund -- can be a safer investment than a bond fund in times of inflation and rising interest rates. That's because bond funds drop in value when interest rates go up. Why? Bond funds are filled with bonds. When interest rates go up, people want to get as much interest as possible. So they like to buy new bonds with high interest rates. Old bonds -- or the ones already in a bond mutual fund -- drop in value because the old bonds have low interest rates that investors don't want. Think of it this way. Assume you have a bond fund filled with bonds paying 4 % interest. Now, new bonds come out paying 6 % interest. Why would investors want 4 %, when they can get 6 %. The bond fund will start buying the 6 % bonds, but meanwhile if they want to sell their 4 % bonds they will have to sell them at a loss. Investors worried about this can buy individual bonds or CDs and hold them until they mature. When you hold a bond, you don't lose money. Yet, realize that if a bond doesn't mature for many years, you could get stuck holding it -- and getting very little interest -- while inflation starts making your living costs go up. Interest rates rise with inflation, so if you think inflation is going to be a threat, don't lock all your money up in bonds that won't mature for several years.During nerve-wracking times when you are afraid of interest rates rising soon, you can park some money in a money market fund. You don't want to do this for a long time, however, because the 3 percent interest you might make isn't keeping you up with the cost of inflation.For more information for retirees, scroll down my blog to find "How Retirees Can Survive the Bear Market." It's under the category: "Survive the Bear Market."
Are you saving for retirement?
If you are many years from retirement, you will recover from this downturn in time. Cycles are painful, but are a natural part of investing. It has been rare for the stock market to remain down for more than five years, according to research by Ibbotson Associates. It has never been down for 15 years. So if you are years away from retiring, you are likely to enjoy the surge that eventually comes after every bear market. On average, after the bear market hits bottom, it surges 44 percent in a single year. Sometimes it's been more and sometimes less. Also, on average investors -- who keep their money in the stock market -- earn back what they lost in 2 1/2 years. When you see "stock market," realize I am talking about the full Standard & Poor's 500, or what you would get in the typical stock market "index fund" in a 401(k) plan. If you are picking individual stocks you are taking a bigger chance.
If you are a nervous investor you can try a portfolio that is 60 percent in stocks and 40 percent in bonds. You can often find such a mixture in a type of mutual fund called a "balanced fund."
Can you make your money safer?
When you combine stocks, bonds and cash (money market funds), you give your money a chance to recover from bear markets, and you insulate it somewhat during the worst periods. Think of bonds and cash as shock absorbers. Financial planners often suggest that people in their 30s and 40s select a 70-30 stocks-to-bonds combination. As people age, they should remove some money from stocks and put it in bonds. So by the time a person is in their 60s, they will have about 60 percent in stock funds and 40 percent in bond funds. If they are a cautious person, worried about the stock market, a 50-50 combination would be better.
Are you using a moderate approach?
Here's how you might divide your money in a moderate portfolio of mutual funds if you can convince yourself to stick with stocks for the long term, but are afraid to be too exposed to the stock market now: 40 percent in bonds, 39 percent in large-cap stock funds which invest in large companies, 6 percent in mid-cap stock funds which invest in medium size companies, 6 percent in small-cap stock funds, which invest in small companies, 9 percent international stock funds. This type of mixture is called "being diversified." If you are in a diversified portfolio and are scared, consider ratcheting back stocks by 5 percent or 10 percent, rather than fleeing altogether.
Can you start buying?
If you are saving for retirement and have a diversified portfolio, keep putting money into it. If the downturn in the stock market is too much for your to stomach, keep saving as much money as usual, but put it temporarily into a money market fund or stable value fund in a 401(k) or other retirement savings plan.
If you can force yourself to use a portfolio like I described above, you will be buying stocks at a price about 20 percent below where they were in early October. Think of it as shopping the sale rack. In a bear market there can always be more markdowns, but at least you know the price you pay today is a better deal than the price you paid while feeling safer in early 2007.
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