Getting Started in the Stock Market

When you purchase stock in a company, you become a part-owner, along with other stockholders, of that company. As investors, you are in the position to reap profits if the company does well, or suffer losses if it does poorly. Since 1926, the average stock has a return-on-investment (ROI) of over 10% per year. That fact makes stock a very solid choice for long-term investing.

The proliferation of state lotteries and the media attention focused on the huge jackpots are ample evidence of the get-rich-quick mentality. However, the chances of an individual winning the lottery are remote, to say the least. The odds of winning a grand prize are well over 1 in 10,000,000.

Fortunately, the chances of getting rich investing in the stock market are considerably better. The main requirements for effective long-term investing are common sense and patience. It must be understood that the stock market is not a get-rich-quick vehicle. You can get rich if you develop and maintain a clear objective, concentrate on the long term, build a diversified portfolio of securities, and stick with your plan.

When you’re ready to take the plunge into the market, you’ll want to consider several questions before making your first investment. The answers to these questions can help you to formulate your plan and your direction.

  • Is capital appreciation your main objective? If it is, look for investments with the potential to grow in value to produce capital gains. You’ll also want to consider reinvestment of dividends and interest.
  • Is income your main objective? If so, try to identify investments whose primary feature is to provide regular income. Also, is the income distributed in fixed payments, or does the payment stream gradually increase?
  • What’s the effect of inflation? If the value of the investment is expected to rise at or above the rate of inflation, the investment is said to be inflation-sensitive.
  • What are the tax considerations? Is the investment to be included in a tax-deferred retirement account, such as an Individual Retirement Account (IRA), 401(k) plan, or other qualified plan?
  • Can you borrow against it? This concerns the general value of the investment as collateral for a loan. Borrowing can be a way of raising cash when an investment cannot be sold quickly, or when it isn’t the right time to sell.

Always base your investment decisions on your own particular financial position, risk comfort level, and goals. No one cares as much about your financial situation as you do. Therefore, do your homework. Consult with, listen to, and learn from professional people that you trust. But in the end, make your own decisions; or if you don’t, make sure that you trust and are comfortable with the decisions of your advisor. The stock market can be a place of great profit or of great loss. When you approach it with a systematic, common-sense investment plan, your odds of being on the winning side improve dramatically, and you’ll be in a position to watch your nest-egg grow to considerable proportions.

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