Part I
The Essentials of Stock Investing
In this part . . .
The latest market turmoil and uncertainty tell investors to get back to square one. Your success is dependent on doing your homework before you invest your first dollar in stocks. Most investors donât realize that they should be scrutinizing their own situations and financial goals at least as much as they scrutinize stocks. How else can you know which stocks are right for you? Too many people risk too much simply because they donât take stock of their current needs, goals, and risk tolerance before they invest. The chapters in this part tell you what you need to know to choose the stocks that best suit you.
Chapter 1
Welcome to the World of Stock Investing
In This Chapter
Knowing the essentials
Doing your own research
Recognizing winners
Exploring investment strategies
Stock investing was the hot thing during the late 1990s â a trend just like hula hoops and pet rocks. With the new millennium, however, a reversal of fortunes occurred as the bear market of 2000â02 rocked our world (a bear market is a prolonged period of falling prices â in this case, stock prices). This decade has been a wild roller-coaster ride that saw the market hit new highs in 2008, although it was down in ugly fashion in 2009. During this time, the public figured out that stock investing isnât for wild-eyed amateurs or dart-throwers (or the worst . . . wild-eyed amateur dart-throwers!).
We wrote much of this Canadian 3rd edition with current events and market conditions on our radar screen. The year 2009 witnessed some ominous events that will make stock investing very interesting (to say the least) for the foreseeable future. Donât let that scare you, though; informed investors have made money in all sorts of markets â good, bad, and even ugly.
As we write this the jury is still out whether North America will remain in a low interest rate environment; or whether weâll step into a new inflationary spiral like we did in the 70s when governments printed and pumped too much money into the North American economy. It seems for now that todayâs rise in money supply is being offset by deflation, thanks in part to persistent unemployment, offshore competition, and weak domestic economic output. As Canadians navigate through these new economic realities, it will become very important to select good stocks that can actually benefit from any given economic state. Recognizing the overall environment youâre investing in is something weâll help you with, and it will help you preserve your nest egg and even make you wealthier.
The purpose of this book is not only to tell you about the basics of stock investing, but also to let you in on some solid strategies that can help you profit from the stock market. But before you invest your first dollar you need to understand the basics of stock investing, which we introduce in this chapter.
Understanding the Basics
The basics are so basic that few people are paying much attention to them. Perhaps the most basic â and therefore most important â thing to grasp is the risk you face whenever you do anything (like putting your hard-earned money in an investment like a stock). When you lose track of the basics, you lose track of why you invested to begin with. Find out more about risk (and the different kinds of risk) in Chapters 4 and 16. (Yes, two chapters â understanding risk is that important!)
When the late comedian Henny Youngman was asked, âHow is your wife?â he responded, âCompared to what?â This also applies to stocks. When youâre asked, âHow is your stock?â you can very well respond that itâs doing well, especially when compared to an acceptable yardstick such as a stock index (like the TSX, or the S&P 500). Find out more about indexes in Chapter 5.
The bottom line in stock investing is that you shouldnât immediately send your money to a brokerage account or go to a Web site and click âbuy stock.â The first thing you should do is find out as much as you can about what stocks are, and how and when to use them to achieve your wealth-building goals. Chapters 2 and 3 help you assess your current financial situation and help you understand common approaches to stock investing. Now is the time to get straight exactly what a stock is. A stock is a type of security that indicates ownership in a corporation and represents a claim on part of that corporationâs assets and earnings. The two primary types of stocks are common and preferred. Common stock (what we cover throughout this book) entitles the owner to vote at shareholdersâ meetings and receive any dividends the company issues. Preferred stock doesnât usually confer voting rights, but it does include some rights that exceed those of common stock. Preferred stockholders, for example, have priority in certain conditions, such as receiving dividends before common stockholders in the event the corporation goes bankrupt or becomes insolvent.
Preparing to Buy Stocks
Gathering information is critical in your stock-investing pursuits, and is best done two times: before you invest, and after. Obviously, you should become more informed before you invest your first dollar, but you also need to stay informed about whatâs happening to the company whose stock you buy, and also about the...
