From Rags To Riches? Essay, Research Paper
From Rags to Riches…. The Stock Market
Almost everyone in this world, has the same dream of never having to go
to work, to just be extremely wealthy. I am not an exception to that, the only
problem with this dream is people don t know how to obtain this goal. There are
many different ways to go about this, but my choice is taking the money I already
have and investing in the stock market. I am not at all an expert on the stock
market, the only involvement with the stock market was in 6th grade, with the
Stock Market Game. I have heard the stories of people
investing in companies and becoming extremely wealthy. In my I-Search Paper I
will investigate how to get started investing in the stock market and how to learn
to make the most money of your money in the stock market.
I am only 19 years old and have people already talking to me about
saving for my retirement. From my parents, all the way to the Presidential
candidates, and I can t believe it. I want to spend like crazy, I am young and
retirement in my eyes is a long way away. But, I also know that if I do act foolish
at a young age with my money, that later on in life I will regret it. My Father is 68
years old and is still working, I don t want to be working at 68. The stock market
to me seems like the safest way to earn money for retirement. As I see it, this will
allow me to save a little less because I will be getting back a larger return than
just a savings account with the bank.
As I see people drive past me in there new fancy car , I wonder if I will
ever be able to afford one and how did they get the money to afford it. I don t
want to wonder I want to know that I will be financially able to buy what I want. I
think that this seems very materialistic, but in the world we live in today,
everyone wants to have the best.
The stock market seems to challenge people in it s complexity, I am
hoping that in my research that I find it easier than assumed. In the Sacramento
Bee there is an article that is published every week written by the Motley Fools ,
which gives advice to the non-professional or new investors. They take all the
technical stock market terms and put them in Laymen s terms. I found out that
these Motley Fools have a book out called The Motley Fool Investment
Guide , I am going to use that book for information. I also plan to talk to my
mothers friend who is an Investment Consultant for Fidelity. The Internet will
also play a big role in obtaining information for my report.
The Internet can connect me to so many resources, that I think it will be
the biggest factor in my research. I can search the New York Stock Exchange to
editorial columns from the Sacramento Bee. Which will let me get different
perspectives from all different types of sources.
The main reason I choose this topic is that, this is something I know little
about. I feel that it is something that should be known very well. I actually
thought of just choosing a topic where I knew a lot, but figured that this was a
great opportunity to learn the stock market. I know that the stock market is not a
sure thing, but I do know that if I don t figure out how it works soon, I will be
behind in my financial goals. The stock market is not the lottery, but it does
almost seem to me that it s a higher form of gambling. I am ready to take the risk
of the stock market, at least after this paper I will feel a little safer with my
decisions in the future.
Section Two: My Research
In my own thinking , I thought finding information about the stock market
would be easy. I brainstormed a certain path I would take. I would start with the
newspaper, then the Internet, and then move on to the library.
All of this while reading The Motley Fool Investment Guide and preparing for
my interview. I figured that I should have some knowledge of the stock market
before interviewing a stock market analyst from Fidelity.
I start with the newspaper, going directly to the Business
section every morning. The newspaper has all the abbreviations of the stock
market identified and also some other useful definitions. The Sacramento Bee
newspaper gave me the bear essentials to learning the how to read stock
market page. Also, once a week, there is a section written by The Motley
Fools , whose book I am reading , that has small up to the date useful
investment tips for the new investor.
While still watching the newspaper, I move on to the Internet. Where I will
log on to America Online to surf the World Wide Web to find information. One tip
that the Motley Fools suggested was to visit the New York Stock Exchange
(NYSE) web site. Following there advice that was my first step on the Internet.
This site was set up perfectly for the beginner to the everyday investor. The
information I received from this one site was tremendous in the history of the
stock market, totally over exceeding my expectations. Yet, I still wanted to
search through the web to see if I could find any other useful facts I may not
have received from the NYSE. That search takes me through all kinds of sites,
from business sites to personal home pages. Most of the business sites had the
same information as the NYSE and the personal web pages were just not
trustworthy. I also sent out some e-mails to a few friends to get there opinion on
the stock market. But, for the most part the Internet had jump-started my
research.
The next step in my research was going to the library. The library was full
of beginner investment guides to the history of the stock market. These books I
am sure would have been more useful, but, it is to late to start reading another
book this late. I had to instead just take exerts of information, instead of getting
all the information that these books had. I should have realized this would have
happened earlier on and gone to the library first. My library visit was probably
the least helpful of all my research.
I am nearly finished with the book The Motley Fool Investment Guide, I
have gained tons of information from this book. I have gone from talking about
how to read the stock exchange to talking about what the Vanguards Index
Trust 500 Portfolio is. This book has totally exceeded expectations and has
made my research a lot easier to understand. This book has not just been easy
to understand, but fun to read with comedy mixed into it.
My last step in my research was to interview Alan of Fidelity who
is a Stock Market Analyst. Our meeting date was on December 1, because of
conflicting schedules. I had been writing questions for him throughout all of my
research. Some questions I have been able to answer myself , but I still have
around 35 questions for him. After my interview with Alan Marcum, I felt like a
beginner even more. My questions almost seemed so elementary for Mr.
Marcum that I felt like I was just wasting his time. He was very helpful though ,
even if my questions did not challenge him. I am now ready to get started on
the final section of my paper to see all my research come together. From
Rags to Riches?
Who doesn’t want to make the most of their money? Most people want to
turn their hard earned money into millions just like me. How to do that is the
biggest question. I think that the best answer is, investing in the stock market.
Many people fear that investing is too difficult to understand. But, that’s why I am
here to teach you the basics of investing in the stock market. When you’re ready
to invest, you have to start somewhere. The question is where? How do you
comfortably enter a world filled with nonsense and mystery? First, you do it
carefully. If you think you’re ready to invest but don’t know the first thing about it,
this is your investment guide.
Understanding what you want from investing, and then determining what
investments will help you achieve those goals is an important first step. Begin
with an understanding of yourself. What is it you want from your investments?
Are you looking for growth, income or some of both? No one investment will give
you everything you want so think about your objectives. Another important thing
is don’t think short term, this is not an automatic thing. You have to leave your
investments in the markets for a long time to get the most from your investment
dollar. Put money in the market that you won’t need for at least five years, and
preferably, ten. You need to make sure that you will have enough money for
now.
Are you comfortable with taking risks? Stocks go up and down. If you buy
a stock and the next day bad news is out and it’s down 10%, how will you react?
This is the hardest part, were not talking about simple savings accounts
anymore. That s like investing $1000 and the next day having it worth $900. Is
your first reaction to sell and run away? I know I would be really tempted to just
get out of it, would you? But a good investor will look at why the stock went down
and determine if this is a buying opportunity or whether the company is truly
“done.” If it’s the former, then an investor will look to buy more stock. If it’s the
latter, the investor will sell. But for good reasons, not from an emotional reaction.
The worst thing you can do is let your reactions take over, you have to be
patient.
Remember that all stocks are volatile, but they also represent one of the
best investing options. “Over the last 77 years, the larger stocks have returned
about 12% to investors(Marcum).” That’s an average, so some years those
stocks went down, but the last few years those stocks have had good
performances. So it’s easy to get very positive on stocks and point to the great
records they’ve produced. But those numbers don’t tell the whole story because
they are averages and include all stocks. If you think about buying stocks, you
won’t buy all of them. You’ll buy individual ones.
If you decide you can stand the sudden drops the market will sometimes
deliver and want to go into stocks, you might want to consider your first purchase
to be a mutual fund. This will give you professional management of your money
and good diversification over many industries. As I see it, mutual funds make
you feel safe about your money.
If you don’t want the volatility of stocks or simply want income, when I
interviewed Alan Mracum of Fidelity he said: “Then you’ll want to consider
buying fixed income investments. These come in many different varieties,
starting with the best first investment you can make: buy a money market fund.
You can do this by simply opening a brokerage account, and depositing the
minimum required by the broker.” Whatever your initial dollar amount is to
invest, you’ll automatically have the money put into a money market fund at your
brokerage firm. This is how you “weasel” out of taking the risk of the stock
market. But, it’s a good way to earn interest on your money while you learn more
about investing.
To a seasoned investor, buying a stock seems so obvious. But one of the
most basic aspects of buying a stock, actually paying for it, is a question many
new investors have. Can you use credit card? How long before you have to pay
for it? Do I need money in the account first? Here are some answers.
There are no specific rules that apply to each brokerage firm. Many
brokers have very strict and conservative ones while others are more lenient.
You’ll need to ask your broker what its rules are when you’re opening your
account so you won’t be surprised when you’re trying to buy a stock. In general,
the following is most typical for new accounts.
When you first open an account, it will most likely be a cash account. That
means you settle trades in cash. A stock trade settles three days after the trade
date, or the day you actually enter the order and buy a stock.
But you may not be able to enter an order to buy a stock without having
money in your account first. That’s because you don’t have a track record of
paying for stock with the broker. If your credit is outstanding and can be
demonstrated through a credit check, you’ll probably be allowed to buy up to a
certain amount of stock, say up to $2500 or so. But most people will have to
deposit the amount of money they’d like to invest before they enter an order to
buy a stock.
That means you have to send a check (the most common way of paying
for stock) to your broker or deliver it in person if there is a branch nearby and
have that check clear before you can buy a stock. You’ll earn interest on your
deposit on the day you hand over the check so you won’t lose any interest
income on your funds. Once the check is cleared and the money is free and
clear in your brokerage account, you can enter an order to buy a stock for up to
the amount of money you’ve deposited.
You may find a broker who isn’t this cautious and will allow you to enter
an order with no money in your account, but that is the exception. Again, you are
not known to the broker so you must establish a pattern of payment for your
stocks. That’s why it’s important to make sure you have the funds in your
account before you do the trade. Then, as you do more trades and you have
some securities in your account, you’ll be able to enter buy orders without
putting money in your account first. Then it’s important that you pay the future
purchases on time.
This part can’t be emphasized strongly enough. Make sure your payments
for your trades, usually checks, are made by the third business day after you
purchase a stock. Don’t mail the check on the settlement day or even the day
before. The check has to be in the broker’s hands by settlement date.
That’s because someone has sold the stock to you, and that party is
looking for its money, just as you would if you sold a stock. So if the broker
doesn’t have your money to give to the selling broker, it has to pay the money
from its own account. Brokers hate to do that (just as you and I do when we have
to “cover” for someone else’s commitments). That’s why you have to have the
money in your account by settlement date. Brokers don’t want to have to write a
check from their own account for you. They want your money because you
entered the order and are now responsible for the trade. Conversely, when you
sell a stock, and you want your money on settlement date, you will receive it,
whether or not the broker has received it from the person to whom the stock was
sold. It works both ways.
If you don’t pay for your purchases on time, your account becomes
restricted. That means you can only buy securities if the money is in the
account before you enter the trade(208 Gardener). A restricted account can be
a real pain, especially if you want to take advantage of a market dip. By making
sure your checks are in by settlement date, you won’t have to worry about
having your account restricted.
And once in a while, an investor will not respond to a broker’s calls to pay
for stock. By the way, that’s why you’re not allowed to use a P.O Box in your
application(NYSE). The broker has to be able to reach you. You have to give an
address and a phone number. When the broker is ignored after repeated tries to
the client, the stock is sold out of the account. If there is a loss, the client is
responsible for it. If there is a profit, the client must first pay for the stock before
receiving the profit. And then the account is closed.
There’s been some talk of using a credit card to buy stock, and some
firms have offered this to highly credit worthy investors. But in general, it has not
been widely used. Even if you have the opportunity, don’t use your credit card to
pay for stock. The interest on the borrowed money is at least 18% and if you
make that in a year on a stock, you’re doing very, very well. Also, there is always
a fee for taking a cash advance which is what buying a stock is. And finally,
you’re borrowing money to buy something that might go down. Imagine owing
the credit card and having a stock that’s worth less than the debt. If this option is
available, don’t use it.
Buying stock is easy. You just have to keep certain dates in mind and
develop a good pattern of paying for them. It makes buying and selling stocks in
the future much easier. I hope you found this informative and taught you the
begging of how to invest. Good Luck!!
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Works Cited
Gardner,David and Tom. The Motley Fool Investment Guide. New York :
Simon & Schuster, 1997.
Marcum, Alan. Fidelity Investment Advisor.Personal Interview. 1
December 2000.
New York Stock Exchange URL:http://www.nyse.com/about/about.html(28 Dec.
2000)