Saturday, 16 February 2008
IS IT WISE TO INVEST IN THE STOCK MARKET?
Buying a 'Piece of the Pie'
Companies need capital, or invested money, to operate successfully. When a company prospers and requires a large amount of capital, its management may choose to offer shares of its stock to the public. One guide to the stock market illustrates it this way: "Stocks are pieces of the corporate pie. When you buy stocks, or shares, you own a slice of the company."
The apparent ease of trading stocks on-line and gaining access to information previously reserved for brokers and professional traders has prompted many individual investors to take up day trading, the buying and selling of stocks full-time. Some have given up lucrative careers to become day traders. Why? "The allure is obvious," explains Money magazine. "No bosses, complete control over how and when you trade and the potential—or so it seems—to make a lot of money." One 35-year-old man who quit his $200,000-a-year job to trade stocks at home is quoted as saying: "How else can you have no inventory and no employees, pay no rent, tap-tap-tap on a keyboard and make a living?"
Experts warn that trading stocks is not as easy as it may seem to a new investor. One psychiatrist who specializes in the stresses of trading observes: "Trading seems deceptively easy, but I like to say that it's the hardest way to make an easy dollar." The endless stream of financial news and advice has not come without side effects. Paul Farrell, quoted earlier, notes: "The relentless thrust of information racing at lightning speed at the individual players—both the individual investor and the institutional trader—is having a major psychological impact: rattled nerves, frustrations, stress."
Overconfidence can also be a snare. Financial columnist Jane Bryant Quinn warns of dangerous attitudes among traders: "You think that if you're at the helm—or at the mouse—bad things can't happen. You'll always be able to intervene in time." She adds: "Because we can access information used by pros, we start to think that we're pros, too." Despite the widely publicized stories of investors who have become rich overnight on the stock market, the trading of stocks carries inherent risks. Some investors have been very successful. Others have suffered significant losses.
In view of the risks associated with the stock market, is buying stock the same as gambling? A measure of risk is involved in nearly all financial investments. Some people buy real estate, not knowing if the value of a property will increase or decrease over time. Others deposit their money in a bank, trusting that their savings will be secure. While the stock market is more complicated, simply put, one who invests in stocks buys the shares of a company in the hope that the enterprise will prosper and the stocks will increase in value.
Such an investment differs from gambling because the stockholder has purchased part of a company. These shares may be sold to another person or saved in the hope of future growth. This cannot be said of a person who bets money at a casino or on a game of chance. Against the odds, the gambler seeks to predict an uncertain outcome and win the loser or losers' stakes.