Financial News & TipsAlan S. Moore / L’Observateur / April 20, 1999Where should that extra money go? Into the bank? Bonds? Real estate? Art? Or will the stock market provide the best possible return? While each individual has a different investment objective, stocks are bought for one primary reason: The opportunity to make money.
Published 12:00 am Tuesday, April 20, 1999
An individual can participate in the stock market in three ways: Investing This is generally the most successful approach because time can be used to an advantage. An investor buys shares to be a part owner of thecompany and to obtain at least an adequate return on the investment (i.e.enough to justify the risk and enable the investor to keep ahead of the cost of living). The investment time horizon is usually a few years orlonger.
Speculating The speculator is willing to assume great risk for a potentially great reward. Being a part owner is not important to the speculator since thetime horizon is to be no longer than necessary.
Trading A trader attempts to take advantage of small price changes and is less interested in intrinsic value. Stock certificates are merely pieces ofpaper to be bought and sold within a short period of time – sometimes days or hours – in pursuit of a profit.
Whether investing, speculating, or trading, a stockholder has the potential to make money by receiving cash dividends (usually paid quarterly) from the company and/or by obtaining capital appreciation if the stock is sold at a higher price than the original purchase price. Of course there areinstances when the price of a stock does not rise. Each day the stockholdercan calculate the theoretical profit or loss, but a profit or loss is not realized until the stock is actually sold.
Stock prices will always fluctuate. But as long as innovative men andwomen strive to profit from new ideas and build new products or offer new services, the value of companies will typically tend to rise.
The story has been the same, generation after generation; “If only my parents had bought shares of that stock years ago, we’d be rich today”! The fact is, the profit opportunity for the long-term investor should be no less than it was five years ago, 10 years ago, or 50 years ago.
Alan S. Moore is a financial advisor at Legg Mason Wood Walker, Inc., asecurities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC.
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