Equities For The Investor

Posted by: admin  /  Category: Business & Finance, Finance, Investing

The reason why this article is titled “Equities for the Investor” is because too often people that aren’t financial market professionals get involved with the stock market without know the difference between trading stocks and investing in stocks – and truth be told it isn’t all their fault. These days anyone with a laptop or smart phone can access a trading platform that gives you the ability to trade the equity markets from virtually any location around the world. The ability to “day trade” the stock market isn’t new. The dot.com bomb that exploded just after the turn of the new millennium was detonated in part by the millions of newbie traders that didn’t understand the difference between trading and investing nor did they fully appreciate the different risks involved in each approach to handling equities.

Investing Versus Trading

Investing versus trading is not a concept that is unique to the equity or stock markets but more people seem to be familiar with stocks and more comfortable investing in them than with other investment products. The concept of investing versus trading is a topic that deserves much greater attention than the following one or two lines that I will provide in reference to the equities market. I suggest that anyone that plans on taking an active part in managing your own investments should investigate this further. Suffice it to say that trading is a much more technically driven process that can, but not always, involve a much greater volume of transactions. Traders will buy and sell stocks all day long with the goal of profiting from each transaction. This is not to say that there are not long term traders and long term  trading strategies in the equity markets, there are. But long term trading of any financial product is really best left to the pros because they go into these strategies knowing how to manage the risk they are taking on in doing so. Investing rather than trading means taking a long term approach that incorporates not just the price movement of a stock or mutual fund, but your personal time horizon and expected return on these investments over the course of your lifetime.

The waters become muddied when people invest in a stock or mutual fund fully committed to this transaction as an investment, only to start trading in and out of the market like a day trader after watching way too much alluring price action. And, having access to every bit of information about the market and the ability to buy and sell equities at the click of a mouse has led many investors down the expensive road to uniformed and untrained day trading.

Equity Market Basics

A stock is your ownership, small as it may be, in a company. Just as governments, city agencies and corporations will issue interest bearing securities called bonds to raise capital, companies will do the same by going to the public and selling shares of their company via the stock market.  As a partial owner of the company you stand to make or lose money on your investment based on the price where shares of the company trade on the open market, The Stock Exchange. The better the company does, meaning the better they are at running their company and making money, the better your investment will perform.

Should I Invest In Stocks?

Perhaps the best reason to allocate a portion of your investment portfolio (remember investment portfolio, not trading account) to stocks is because you stand to make the highest possible return from them. However, investments in equities also carry a much greater level of risk so bear in mind you probably should only invest a portion of your total investment dollars in equities, and this portion should be a function of your age and your risk tolerance.  The further away from retirement you are the more risk you can manage, and vice- versa. These are volatile investments so as they say, whatever goes up can go down and if the price of your equities are falling at the same time you need to liquidate them to use the money, you could be faced with the difficult choice of waiting until the price goes back up before selling (if the price goes back up) or simply cutting your losses right then and there.

The individual investor with limited knowledge of the financial markets is probably better off  investing in equities through an equity mutual fund. These offer similar returns to owning individual stocks that you buy on your own but in the case of a fund, your money is pooled with other investors and then managed by financial market professionals. They then choose a variety of stocks from among similar companies in order to get the highest return possible for those investing in the fund. The stocks that these professionals choose for the fund will come from among those that fit into a certain criteria or prospectus that tells investors the types of investments in a particular mutual fund i.e. emerging markets, small cap funds, large cap funds etc.

Think Before You Invest

The two key words here being “think” and “invest.” Equities are one of the best investment vehicles for all but a few people but they do have inherent risks that are not necessarily found in other financial securities. Therefore make sure that you understand the nature of these risks and that you are prepared for both the best and worst once you get involved in these markets. If you aren’t you run the risk of falling down the slippery slope of investor turned reluctant, and poorer day trader.

My take: Equities are a great investment product for almost everyone, but given the 24/7 financial news cycles too often equity investors get spooked out of their investments and strategy. There are a variety of other investments that may make sense for your portfolio.  The return has been tremendous.  Perhaps you might look into growing businesses and investing in them as part of your overall investment strategy. Most people need to take the time to identify their investment goals, set up and investment plan, and then stick to the plan. And for most people, it is best to consult with and make use of the assist a professional investment counselor.

 

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