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Lesson 1. Confronting Your Fear of Stocks

In this lesson you will learn what stock market investing really entails as opposed to common

myths you may have heard.

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I l@ve RuBoard

What You Need to Know Before Beginning

Welcome to the world of investing in the stock market. You are about to join the ranks of a

very elite group of people, namely those who have decided to actively manage their own

money and make it work for them. This is a big step, and not one that should be taken

without sufficient preparation. Before beginning with the more technical aspects of investing

in the stock market, then, you should first ensure you have dealt with any mitigating

circumstances that might otherwise distract you.

TIP

Many outside factors, such as lack of cash and preexisting fears, may affect your

investment abilities and decisions. Learn about your fears before attempting to

invest.

The most obvious confounding circumstance would be lack of cash with which to invest. The

effects of this situation would probably be limited, however, to a lack of opportunity for profit.

Also significant would be a lack of understanding of how stocks compare with other

investments. That is explained here sufficiently to neutralize that fear.

More insidious, however, are the preexisting fears many people bring with them. These fears

can affect investment decisions up to and including the decision whether to invest at all. Here

are some common ones:

Fear of technical-ese

Fear that your financial knowledge is insufficient

Fear that investing is only for millionaires

Fear of stock market crashes

Fear that investing in the stock market is a gamble

Fear that investing is too time-consuming

Because these fears have the potential for damage, it's best to meet them head on. Face

your fears of the stock market directly by learning the truths behind erroneous information

you may have heard. You will then be able to place any reservations you may have had in

their proper perspectives.

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Technical-ese

The stock market has a language all its own-street talk. Terms like zero-coupon bonds, net

asset values, and price/earnings ratios are absolutely guaranteed to draw a blank look from

the average person on the street. This shouldn't be surprising. Every trade, sport, and craft

has a certain number of terms or phrases that are unique to it. And, since language is

created by need, specific terms have arisen in each sphere to address this need for

description.

TIP

To deal with the fear of technical-ese, or the terminology used in the financial

community, keep in mind that as a beginning investor your need for learning these

terms is limited.

The terminology used in some areas, in sports for example, is familiar to almost everyone.

Most people know what a seventh-inning stretch, a free throw, and a touchdown are even if

they've never played or attended a game in their lives. However, in other areas, such as law

and medicine, the terminology seems confusing and technical, leading to the general

consensus that much schooling and substantial intellectual ability are required to understand

any of it.

Unfortunately, finance-which includes the stock market-has long fallen into that second

category. There could be several reasons why. Perhaps one is the fact that much of finance

involves math-and we all know how we struggled with that in high school. Perhaps it is

because Wall Street's conservative image makes us uncomfortable and thus we don't

pretend to understand what it's about and we are hesitant to ask.

TIP

While the sheer number of financial terms might be a little overwhelming, learning

them isn't as daunting a task as it might appear. Many basic terms are used very

frequently and will quickly become familiar.

For the longest time, and to some extent even today, the financial community was dependent

on mass ignorance to survive. For example, let's take the term "investment management."

This term means just that, the management of investments. Under normal circumstances, the

average person certainly wouldn't trust someone else to take care of everything he or she

owned. So, investment managers, brokers, and financial analysts regularly tossed out terms

that they knew their clients wouldn't understand. Since no one wanted to appear stupid, the

clients would simply nod their heads a lot and be grateful that someone was around who

could interpret all these obscure terms. By intimidating their clients this way, investment

managers kept their clients from realizing investment management was little more

complicated than the management of their household finances, which the clients were

already doing themselves. Should the masses ever wise up and begin to manage their

investments themselves, the jobs of the investment managers would disappear.

In all fairness, however, there are a significant number of specialized terms used in the stock

market-the world of finance has to be described somehow. The financial community is

directly involved in almost every aspect of every person's life on the globe today; it employs

hundreds of millions of people and is comprised of every industry in existence. Trying to

describe all that this includes is going to take a lot of words. But, happily, you certainly don't

need to know all the terms in order to be a successful investor. I am a longtime professional

financial writer, and I still look things up. All you need to learn are the terms that are relevant

to you. And this book is a good place to start. In addition, by gaining a working knowledge of

investment terminology, you will be able to manage your own investments should you choose

to, just as you manage your own household finances and paycheck. After all, who is better

equipped to make decisions regarding your money than you?

As the terms rise in complexity, they are less familiar even to seasoned financial veterans.

For example, the percentage of customers in a bar who order a basic drink like a martini will

be pretty high. In much the same way, certain words will prove to be the basis for describing

your particular financial investments. When a customer orders something strange like a

Screaming Viking, the bartender will need to look up that drink recipe or simply ask the

customer what is in it. Similarly, when hit with a term you don't understand, you can either

look it up or ask someone to explain it to you. By the way, don't be embarrassed to do this. I

haven't met anyone yet who doesn't love the opportunity to expound on what he or she

knows about stocks. Also, you'll never need to ask again.

I l@ve RuBoard

I l@ve RuBoard

Insufficient Financial Knowledge

Not understanding the workings of financial markets, such as the stock market, is

comparable to not understanding financial terms, but the potential for getting into trouble is

much greater. A lack of knowledge when you invest in the stock market can get you

financially wiped out. Here are two tips for obtaining the knowledge needed to be a

successful investor:

1.

2.

Up to now you have probably had little or no reason to learn about the workings of the

stock market. Until the time I decided to take sky diving lessons, I couldn't have told you

at what altitude the cord must be pulled. Before I took my first plunge, however, I assure

you I was very sure of when I was supposed to pull my chute. In much the same

fashion, you should learn everything you can before taking the investment plunge.

As with the technical terms, you only have to learn the workings of those investments

that pertain to you.

TIP

If you feel intimidated by financial information, the best way to deal with it is to

casually scan through the financial media. Pick up a copy of The Wall Street Journal

or watch Moneyline on TV. You'll be surprised to discover that you understand a lot

more than you thought you would.

This book is designed to explain the internal processes of the stock market that are relevant

to you the investor. It will not overwhelm you with extraneous information but instead will give

you the essential information you need to know to get started as an investor. Over the years I

have learned such informational tidbits regarding the workings of the stock market as how

stocks are coded into various classes, how trades are settled, and how to recognize the

various functions of the floor traders from the colors of their coats. All of this is certainly

interesting and often fun information; however, the color of a floor trader's coat will in no way

help you make intelligent investment decisions.

There's an old phrase that sums up expertise quite nicely, "Everything is easy … if you know

how." With that in mind, this book attempts to explain some of the more esoteric functions in

terms and with examples that are familiar to the average person. The real responsibility of

understanding these functions, however, is up to you, the individual investor. This is

important because, as like any industry, the stock market has unscrupulous people who prey

on uninformed investors. The golden rule of investing, therefore, is "Know what you are

getting yourself into." Only by arming yourself with knowledge can you ensure that you will

not be taken advantage of or make a bad decision.

It's Not That Difficult

Fortunately, expanding your financial knowledge is not hard. Repeated exposure will make

many of these things increasingly familiar. So, here are some good ways to increase your

knowledge:

Listen to the financial news.

Look at the stock pages.

Check out financial Web sites.

Do these activities even when you do not understand what is being discussed. Initially, this

may prove a little frustrating, but over time you will begin to develop an understanding that

will become your knowledge base. Soon you will be able to ask the appropriate questions

needed to gain a fuller understanding.

In addition, don't try to learn every aspect of every financial vehicle in every market in the

world. The terminology is massive, because the financial marketplace itself is massive. Start

out small and work your way up. The focus of this book is stocks and their corresponding

markets. Save learning about the bond market until next week and foreign currency

exchanges until the week after that. Eventually it'll all come, you'll see.

CAUTION

Remember that your own money is on the line. If an investment is worth your hardearned

cash, then it's certainly worth taking the time to understand all the

information available on your investment.

Finally, and most important, if you don't understand something, either look it up or ask. It is

absolutely imperative that when you first learn about the stock market, or the greater financial

community, that you fully understand the basics. Subsequent information will grow

increasingly complex and most, if not all, of that information will be based on the assumption

that you are already familiar with the more basic processes. If you are not, the potential for

disaster is greatly increased. Also, even in the more complex processes, ask for clarification

of anything you don't understand. Chances are if you don't understand it, others haven't

understood it either.

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I l@ve RuBoard

Stocks Are Only for Millionaires

The belief that stocks are only for millionaires is probably the most common reason why

people avoid the stock market. There is a circular train of thought that says that the reason

people believe that stocks are only for millionaires is because everyone who buys stocks

eventually becomes a millionaire. If only this were true … the reality, however, is substantially

different. This impression is probably based on the numbers bandied about in the financial

markets.

Initial investments in mutual funds currently average $2,500.

Minimum purchases of municipal bonds can total thousands of dollars.

A hundred shares of Coca-Cola would cost about $4,400 right now.

Such large amounts are frightening to many people. And, should the average person receive

a windfall of $4,400, quite frankly a trip to Disney World would probably precede the

purchase of a hundred shares of Coca-Cola.

The irony is that the very people who should be investing in the market are not, for these very

reasons, doing so. The investor who can buy a hundred shares of this or that without a

second thought is probably so rich that investments are the last thing he or she needs to

worry about. On the other hand, the average person on the street-that is, you and I-needs

to take a very different approach to investing.

Fill the Bucket Slowly

This book explains in great detail several strategies for investing minimal amounts on a

regular basis. For right now though, consider your beginning investing attempt as filling a

bucket under a dripping faucet. The rich person over there is the only person who can afford

to pay the water bill this month. As a result, he or she can turn on the faucet and fill up the

bucket in a matter of seconds. Since we poorer people can't afford the water bill, we are

resigned to filling up our bucket from the drops that are falling from the turned-off, but leaky,

faucet. While our method will certainly take more time, in the end it will yield the same results

as turning on the faucet. Translate this to money instead of water, and you can see the

advantages of constantly dripping small amounts into your investments. In the end, you and

the rich person will both have a bucket of water … make that a bucket of money.

TIP

One fear is that the stock market is geared to big investors and that the average

person doesn't have enough funds to actively participate. Deal with this fear by

discovering the many investment options that are designed to accommodate people

at any financial level.

Like many of the reasons you and other potential investors have for not investing, the

concern of not having "enough" money to invest is not new. Fortunately, the financial market

is a place of business, and as such it continually modifies itself to attract new investors. Many

programs have been created to accommodate new investors having little or no available

cash. These are not scams; they are honest attempts to accommodate the situation of the

majority of the American public.

Frankly, most people don't have a couple of thousand dollars lying around. So,

accommodations exist for people who wish to purchase one share of stock or invest the

same amount into a monthly stock purchase. Direct deposit programs can ensure that

investment amounts are deducted before the balance is deposited into a checking account.

Many brokerage firms periodically reduce the initial amount required to open an account

through the use of "sales." Of course you will have to do a little poking around to see what is

available out there. As a general rule, however, few companies will refuse your money.

Fill the Bucket Regularly

The trick to investing with little money is to begin by putting money away regularly. Give the

money to a friend or family member, or, better yet, open a savings account and direct deposit

some of your paycheck into that account. Put it under your mattress if you need to. When the

amount rises to the level of a minimum investment, transfer the money then. Virtually all

investments like stock purchases will accept subsequent investments in much smaller

amounts (often $50 or $100).

This strategy of small but regular deposits can be really distasteful at first. Once the decision

to invest has been made, you, like most investors, will probably want to see progress

immediately. Many investors are even disappointed enough by this inertia to abandon their

investment careers. But, like the dripping faucet example, the bucket will eventually be filled.

Delays in making deposits will only prolong the time needed to fill the bucket.

Finally, be aware that many of these programs and opportunities have, in fact, enticed a

number of "average" people to invest in the stock market. Roughly 20 percent of the

American population, or 40 million people, currently own stock. And this figure does not even

include the people who own stock indirectly through a program such a retirement account.

You are not alone in the market, nor are you an inconvenience to those who are already

invested. The participation of individual investors is critical to the market's success and, as

such, they will be accommodated.

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A Stock Market Crash

Many people are frightened by the stock market because of the stories about past market

crashes. Yes, those crashes did happen, but the fear surrounding them is more hype than

substance.

TIP

Your fear that the market will collapse as it has done in the past is best dismissed by

learning that the probability of another crash is infinitesimal and that the damage

caused by previous crashes was not as bad as the public's perception of them.

On October 29, 1929, the Dow, a measurement of the stock market as a whole, fell 30 points

to close at 230.07. This represented a drop of almost 13 percent in the whole market. The

loss of market value was roughly $14 billion, a staggering sum even now. This meant that

$14 billion of the total amount invested into the market by people and by entities such as

pension funds was simply gone. The severe ramifications of this event affected even those

people who had not actually invested in the market. The subsequent depression, while not

directly a result of the stock market crash, further entrenched the idea that investment in the

stock market would later reduce the investor to selling apples on a street corner while

wearing a barrel. Finally, the stories and depictions of grown men throwing themselves off

roofs and crying at their desks assured the general masses that stock investments could only

cause heartache.

In addition, 58 years later, the crash of 1929 was surpassed by Black Monday and Black

Tuesday on October 19 and 20, 1987, respectively. The Dow's drop of 508 points

represented more than a 22 percent drop in the total value of the market and over $500

billion of investor dollars. The crash of '29 was a picnic by comparison.

These events have been highly analyzed, and rational and reasonable explanations for both

crashes have been presented and generally accepted by the marketplace. The crash of 1929

was attributed to the market's practice of accepting credit to pay for stock purchases. That

practice has long since been cancelled. In addition, program trading, or the ability to trade

stocks in a matter of seconds through the use of computers, has been blamed for the crash

of 1987. Both of these explanations are probably not particularly important, however, to the

people who owned stock at the time of the crashes. The focus is not on why the money was

lost, but on the fact that the money was lost.

Two things are important to remember in attempting to place investors' fears in the proper

1.

perspective in light of these unfortunate events.

1.

2.

The most obvious is that the crashes are infrequent events. Twice since the inception of

the stock market in 1792 is not a bad track record. Your chances of being involved in a

stock market crash are slim to none. Once invested in the market, you will come to

realize that the likelihood of a market crash is so infinitesimal as not to be a concern

anywhere in the financial community. By sharing in that confidence, you will be able to

discard your fear altogether.

Persistent new investors will continually ask, "But what if …?" After all, a chance, no

matter how small, of the market's crashing does exist. This question has arisen as a

result of the recent collapses of the Asian and Russian markets. It should be pointed out

that while markets around the world were crashing, often as a result of the ramifications

of prior crashes in other countries, the American market remained stable. The American

economy is 16 times larger than its next-largest competitor, a fact that lends an

incredible amount of stability and strength to American stock markets. Crashing them

simply isn't that easy.

In the highly unlikely case that the markets do fail, remember that in both crashes the

average investor may have suffered heavy losses but was not wiped out totally. A loss of 12

to 22 percent of your initial investment is without a doubt disastrous, but it simply isn't that

significant when compared with the amount of money that the investment probably had

made. In the same train of thought, both of the crashes were preceded by extended

favorable, or bull, markets.

Happily, the history of the stock market has taught us that bull, or favorable markets tend to

last longer than bear, or unfavorable, markets. The term "bull" market was taken from early

bear trappers. They were notorious for depending on the price of fur to drop so they could

purchase pelts cheaply to cover prior options trades they had made. A popular sport at the

time, bull and bear baiting, depicted the bull and bear as natural enemies, so the term bull

market was used to describe the opposing rising market.

Plain English

The terms bull market and bear market are used to describe the conditions of the

market. Extended periods when stock prices continue to rise are referred to as bull

markets, and periods when stock prices fall are known as bear markets.

In 1929 the stock market had reached a new high of 469.49 the month before the crash. In

1987 the stock market had also reached a new high of 2,722.42, two months before the

crash. It is safe to assume, then, that a significant portion of the money being lost by

investors was the profits that they had made from their investments. This doesn't mean that

their losses weren't real, however. If at the end of the day you still have the money you put

into the investment, it is difficult to say you lost anything other than the time that your money

was occupied and, of course, any opportunities which were missed as a result of it.

Many fears may be somewhat justified. To not invest because you fear a stock market crash

is not one of them.

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Is Investing Like Gambling?

Investing in the stock market is not gambling. True, both do attempt to accurately predict

future outcomes, but the similarities end there. The inherent fear in gambling is that the

outcome is determined by something over which you have no control and understand even

less-a pair of dice for example. This is not the case in the stock market. In the stock market,

investment decisions are made after a careful analysis of the available information. For

example, let us say you receive a windfall of $100.

Option 1:

You don't have any real need for that money right now, and you sure wouldn't mind trying to

make that money work itself up to a bigger sum. You could place a bet on the roulette wheel,

in which case the fate of that $100 would depend entirely on your ability to predict random

probability. Regardless of how much research you put into that prediction, the end result

once the ball began to roll would be determined by nothing more than sheer chance. That's

pretty risky.

Option 2:

Investing in stocks works a little differently. Once purchased, a stock represents a partnership

between its issuing company and its investor. The investor has agreed to buy into the

business and, in return, the issuing company has agreed to try to increase that amount by

using it to improve the business. You want the company to succeed; the company wants to

succeed. Where is the gamble in that?

Choosing which partnership you want is also not gambling. The research involved here is not

an attempt to understand a science like random probability; it is designed to increase

familiarity with the company. Think of it like a job interview. During the interviewing process,

at one point or another you will be introduced around the office while you take the tour. In this

way, you can decide whether this company is one for which you would feel comfortable

working. In the same way, information on the issuing companies is made available so you

can decide whether this is a company in which you would feel comfortable investing.

TIP

The fear that investing in the stock market is reliant on chance is proved wrong as

new investors learn that the processes and tools with which they pick stocks are not

based on random chance but on intelligent research and decision making.

The inherent difference between gambling and investing is ultimately control. By gambling

your money, you have handed over control of it. The fate of your money rests on something

over which you have no control-the hopes that it will manage your money better than you

through the magic of probability. By investing, you are charged with the responsibility of

learning which stock will best manage your money in a manner consistent with your stated

preference. You directly control the company with your vote, and you can revoke your

partnership at any time. Because you are appropriately informed, the decisions are not left to

chance.

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It Will Take Too Much Time

Initializing and subsequently diversifying your portfolio should never take up an inordinate

amount of your time. Even as you expand your portfolio and begin to include other financial

instruments, a process known as diversification, the initial purchase of stock will be your

decision. Should you decide to spend hours researching, you are perfectly free to do so. Or,

you might ask a friend to give you advice. You decide to purchase the stock for whatever

reason you consider important. Research is never required.

Plain English

A portfolio is a collective term for all your investments. It should consist of cash as

well as different kinds of investments, such as stocks and bonds. Determining how

much of each you want is a process known as diversification.

After purchasing the stock, even monitoring its performance is optional. Should you decide

you want to know the stock's performance for the day, through the use of several methods

described in this book, you will be able to uncover any information in a matter of seconds.

But most important, you still control the amount of time you allot to monitoring your stock's

performance. Monitoring your investments is also not required.

So the total time commitment is solely your decision. That doesn't mean you shouldn't take

the time to learn anything. You obviously have some interest in the stock market, or you

wouldn't want to invest in it. As with other areas that catch your attention, you should take

some time to learn more and to become increasingly familiar with the market.

What inevitably happens is you start to become interested. Once you've learned how stocks

work, you start to wonder how bonds work. In addition to stocks you already own, you begin

to check the daily performance of stocks that you are considering purchasing. After learning

the business of one company, you become interested in how the competition is being run. As

your interest in finance expands, it is highly possible that you may find yourself putting more

time into it. However, this is your choice. The reverse is also true: Should you have no

interest in your investments or later lose interest, you are free to ignore the whole lot.

TIP

The fear that managing your portfolio will consume too much time is dismissed

when new investors discover that research is available but not necessary and that

they control the amount of time they want to devote to research.

As your holdings grow and expand, the amount of time you dedicate to learning about new

investment vehicles and to monitoring your expanded portfolio will also grow, but only

infinitesimally since the entire process requires only a few seconds in the first place. You

could continue to invest in the vehicles with which you are already familiar and thereby

further reduce additional time commitments. Or, you can begin to learn about alternative

investments at your leisure.

Like any commitment you make, investing will take up some time, but how much depends on

your decision. The truth, however, is that by the time you have so many stocks that

maintaining them is actually causing you time problems, you should be rich enough to afford

to pay people to do that for you.

The 30-Second Recap

Financial terminology should not be intimidating.

The basics of the stock market are not complicated.

Investment options exist for people of any income level.

The market is a safe stable place to put your money.

The stock market is not a game of chance.

The time required to manage your investments is minimal.

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