Learn to Invest in the Stock Market

| Posted: 27-12-2007 | Comments: 0 | Views: 8 | Rating: (59)

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Stocks, in general, are best suited for long-term goals such as these:

_Achieving financial independence (think retirement funding)

_Paying for future college costs

_Paying for any long-term expenditure or project

Some categories of stock (such as conservative or blue-chip) may be suitable for intermediate-term financial goals. If, for example, you will retire four years from now, conservative stocks are appropriate. If you’re optimistic about the stock market and confident that stock prices will rise, then go ahead and invest.

However, if you’re negative about the market (you’re bearish, or you believe that stock prices will decline), you may want to wait until the economy starts to forge a clear path. For more on investing in bull or bear markets. Stocks generally aren’t suitable for short-term investing goals because stock prices can behave irrationally in a short period of time. Stocks fluctuate from day to day, so you don’t know what the stock will be worth in the near future. You may end up with less money than you expected.

For stock market investors seeking to reliably accrue money for short-term needs, short-term bank certificates of deposit or money market funds are more appropriate. In recent years, investors have sought quick, short-term profits by trading and speculating in stocks. Lured by the fantastic returns generated by the stock market in the late 1990s, investors saw stocks as a get-rich-quick scheme.

It is very important for you to understand the difference between investing, saving, and speculating. Which one do you want to do? Knowing the answer to this question is crucial to your goals and aspirations. Investors who don’t know the difference tend to get burned.

Here’s some information to help you distinguish among these three actions:

_ Investing is the act of putting your current funds into securities or tangible assets for the purpose of gaining future appreciation, income, or both. You need time, knowledge, and discipline to invest. The investment can fluctuate in price, but has been chosen for long-term potential.

_ Saving is the safe accumulation of funds for a future use. Savings don’t fluctuate and are generally free of financial risk. The emphasis is on safety and liquidity.

_ Speculating is the financial world’s equivalent of gambling. An investor who speculates is seeking quick profits gained from short-term price movements in that particular asset or investment.

These distinctly different concepts are often confused even among so-called financial experts. One financial advisor who actually put a child’s college fund money into an Internet stock fund only to lose over $17,000 in less than ten months. This advisor thought that she was investing, but in reality, she was speculating.

Another advisor who told a client to avoid savings accounts altogether because the client had a 401(k) plan. This particular advisor didn’t catch the crucial difference between “saving” and “investing.” The client eventually found out the difference, his 401(k) fell by 40 percent when the bear market of 2000 arrived.

Fortunately, we can learn from these situations and get back on track.

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Learn to Invest in the Stock Market

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