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Thursday, July 19, 2012

Investment Options: Investing in Stocks

At time comes when a company is need of some money, either to expand its work force, build a new factory or open up a new office. Whatever the need, the company has two choices available for raising this money: 1) to borrow the money or 2) by selling a stake in the company to investors. The first option is quite straight forward as it involves taking loans mostly from financial institutions and repaying it with some interest – so I won’t dwell much on that. For now, it is the second option which most interests me.  The selling of a company’s stake to investors is what you often hear them call “issuing of shares to the stock market”.
Whenever you buy a share of a stock, you are simply buying a part of the company and therefore become a part of its ownership. Just like any other owner, you lay claim to the company’s assets and every penny it earns henceforth.
Unfortunately, stock buyers rarely assert their ownership claim in the company and in most cases do not think like owners – They rarely have a say on how the company is run.
Nonetheless, it is from this ownership structure that stocks get their value. Were it not for the claim stock owners have on the company’s earnings, stock certificates would just be pieces of printed paper. As a company improves in earning, so is the willingness of investors to pay more for its shares of stock.
Stocks have generally been a solid investment option, over time. This is because, as the economy grows, the corporate earnings grow and so are the stock prices.
Since early 1926, the average large stock has returned close to 10 percent per annum. If you were saving for your retirement, that is quite promising - - it is far better than the government’s saving bonds, or hiding your cash bellow your pillow or mattress.
When I say “generally” and “over time”, these two words just give a loose consideration and not a real measurement of returns from stocks. The time is relative and in some cases, stock investments have led to losses rather than returns. But as many stock investors would attest, prolonged bears market can easily ruin a portfolio.
Ever since WW II, Wall Street has suffered several bear markets – shown by the steady decline in value of Industrial Average by up to 20%. Eventually, bull markets follow these slumps, but again, using “eventually” only offers small nourishment in the middle of the downdraft.
The whole point, however, is that investments must be seen as a long-term goal if you are to succeed. For you to stand the pain of bear markets, you must have your stake in the game whenever it turns positive.

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