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Stock Market Facts & Fiction

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  • Stock Market Facts & Fiction

    Millions of Americans invest in the stock market directly and many millions more invest in the stock market indirectly by owning mutual funds in 401k plans, IRAs and so on. Most don't really understand their stock investment, and some are just clueless. Where do you fit? Here's a morsel of stock market fact and some fiction.

    The stock market goes up more often than it goes down... That's a fact, and the reason stock investing has interested people for decades. However, the market goes through cycles that are difficult to foresee ahead of time. In other words, there are good times in the stock market and there are bad times.

    People should invest money in stocks primarily to receive dividends... I call that fiction because the primary source of profits in stock investing comes from price appreciation. That's a fancy term for rising stock prices. Some of the best stock investments over the years have paid virtually no dividends at all. They are commonly called growth stocks. If you pay $10 for a stock and sell it a few years later for $50, who needs dividends?

    "Equities" is another term for stocks, and unless you have big bucks you can not invest money in them... Equities are stocks, they go by both names. Unless you consider a couple of thousand dollars a lot of money, the rest of the statement is not true. However, if you can not afford to take a loss do not make a stock investment.

    The stock market pays 10% a year... Watch out for that one. Over the years equities have returned on average 10% over the long term. Last decade the average stock investment actually lost money. Stocks PAY about 2% yearly in dividends on average. When the stock market goes down over a period of years, these dividends help; but they won't save you from taking a loss.

    Equity mutual funds are a safe form of stock investing... If you don't have the knowledge or experience or inclination to manage a portfolio of equities on your own, they are your best stock investment. But you don't invest in them for safety. You invest for growth, to earn a higher return.

    When you invest money with a financial planner, part of his job is to assure you make money in any stock investment he puts you into... Unless his or her name is Houdini, you're asking too much. A financial planner's job is to help you reach your financial goals as you expressed them to him. When the market's down, the vast majority of people lose money in their stock investment. Period.

    If the stock market falls 50%, and then goes up 50% you break even... Not quite. Ask those who were into stock investing in 2008 through 2009. If a $1000 stock investment falls 50% it is worth $500. If it then goes up 50% you've got $750. Learn to think in terms of percentages. Taking a big loss can set you back for years.

    The best stock is often a penny stock... The greatest percentage gainers are often low- price issues, and can go up 1000% or more in a year. However, as a group they are very risky and not your best stock investment. If you pay less than $1 a share and the share price drops to zero, you've lost 100%, no matter how much you had invested. The majority of true penny stocks get cheaper and then disappear, worthless.

    If everything in this article was obvious to you, you are obviously not clueless when it comes to stock investing. On the other hand, I like to write on a real basic level once in a while, because I've learned that most people don't understand the basics when they invest money. It's better to pick up a morsel of facts once in a while than to continue to invest money totally uninformed. It's the fiction that can ruin your financial future if you don't know the difference. Especially if a scam artist gets your name and telephone number.

    Beating the stock market consistently is a very low-probability proposition. Very few professional investors can do it. The good news is that you do not need to beat the market to make money stock investing. But you do need to learn to separate fact from fiction.

    A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

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