Why Invest in Stocks?
In November 2001, Enron filed for bankruptcy. Investors
who bought the stock of this high-profile company at $60
per share at the beginning of that year saw their investments
For the three-year period from March 2000 through 2003,
the stock market was in a steep decline. The Nasdaq
Index was down 71 percent. To put this in historical perspective,
the stock market has not seen such a decline
since the Depression of 1929.
The stock price of Boeing Company was $33.50 a share on
November1, 2001, and rose to $85 per share on May 3,
2006, a 155 percent increase over the four-and-a-half-year
The preceding Investment Snapshot illustrates the ease with
which you can lose money investing in stocks. Yet more than half
the households in the United States own stocks either directly or
indirectly through retirement accounts. Understanding what
stocks are and how stock markets work can help you to avoid
the costly mistakes when investing in stocks and to build a portfolio
of stocks that include winners such as the Boeing Company
WHY YOU SHOULD INVEST IN STOCKS
The Investment Snapshot poses the question: Why invest in stocks
when you can lose part of your investment? The answer to this
question can be obtained from Figure 1–1, which illustrates why
stocks are so compelling an investment.
Over the 19-year period from 1986 through 2004, both largecompany
and small-company stocks outperformed bonds and
Treasury bills and kept well ahead of inflation. In 5 of the 19 years
stocks underperformed bonds and Treasury bills. However, an
investor with a long time horizon should not be bogged down by a
small number of negative yearly returns because the focus should
be on accumulating long-term wealth.
Annual Returns of Stocks, Bonds, and Treasury Bills, 1986–2004
Total Real Returns from Investing $1 from 1926 to 2000
Figure 1–2 illustrates how the total real returns of stocks outperformed
significantly returns of bonds and Treasury bills over the time
period from 1926 through 2000. One dollar invested in each of the
aforementioned investments had markedly different returns when
adjusted for inflation. For a one-dollar investment in small-company
stocks, the total accumulated value would have increased to over
$500, whereas a similar investment in large-company stocks would
have returned $150 over the period. Real returns on Treasury bills,
long-term Treasury bonds, and corporate bonds were $1.50, $3.79,
and $5.50, respectively. These returns illustrate how compelling stock
investments are over long time periods.
You can draw the following inferences:
For stock investors, a long time horizon is needed to reduce
the risk of loss.
In order to earn greater returns over a long time horizon,
stock investors should not focus on the volatility of annual
returns, which may be thought of as bumps in the road to
larger overall returns.
Losses in the stock market are hardly noticeable over long
periods of time.
Small-company stocks earn larger returns than largecompany
stocks over long periods of time.
For short time horizons, bonds and Treasury bills might
Bonds earn larger returns than Treasury bills (money market
Investing in common stocks offers federal tax benefits not
available to bond and money market investors. Dividends
from common stocks are taxed at preferential federal rates
(lower than marginal tax bracket rates), whereas interest
from bonds and money market securities are taxed at the
holder’s marginal tax bracket rates.
Table 1–1 lists some of the reasons why you should consider
investing your long-term money in stocks to earn larger returns
than those of bonds, Treasury bills, certificates of deposit (CDs),
and money market mutual funds.
Investors with a long time horizon (more than five years) who
can withstand the risk of loss owing to down markets should invest
in stocks. Investors with shorter time horizons who need to
earn current steady streams of income from their investments and
who are risk-averse should invest in bonds. The types of securities
that you invest in are determined by your financial objectives and
your personal characteristics.
Major Reasons to Save More and Invest Wisely
* People are living longer and need more money to fund retirement.
* Health care, education, and insurance costs are rising.
* Real estate and housing prices have risen steadily.
* There is a need to get ahead of inflation and improve standards of living.
* People want to accumulate wealth to pass on to heirs.
* The more you save and invest now, the greater is your purchasing power owing
* Investing wisely increases your wealth.
Why you should invest in stocks
Developing your financial plan
What investing in stocks can do for you
Categories in Trading Mistakes
Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor
Using too much Leverage
Determining the proper capital requirements for trading is a difficult task
Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure
Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader
Useful Advices to Beginning Trader
You can control your success or failure
All about Stocks
Encyclopedia about Stocks. That you should know about Stocks before starting
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