Understanding the stock market - part 1

Ebony, August, 1997

With the stock market setting new records on almost a daily basis--and investors making record profits just as often--financial experts say it is imperative that you understand what all of the fuss is about.

"For the last three years, the stock market has risen in excess of 20 percent each year," says Gordon J. McClendon, president of the McClendon Group, a financial development and consulting firm with offices in Chicago and Washington, D.C. "No one can say whether it will continue, but the stock market has performed greatly with a strong economy. My opinion is that the stock market will continue to eclipse itself until around the year 2005."

Even with a 10 percent return--the market's average during the last decade--over time your investment can really add up. For example, savings $10,000 in a bank savings account at 3 percent interest will turn into more shall $13,000 in 10 years, but the same money in the stock market, at a return of 10 percent compounded yearly, will net you about $26,000. But if you left that $10,000 in the market for 25 years, it could top the six-figure mark.

Let's start by destroying three myths: 1) the stock market is only for the rich; 2) the stock market is only for the highly educated, and 3) the stock market is a way to make fast money. Deborah Frazier, assistant vice president and senior financial consultant for Merrill Lynch in New York, says none of those are true. She says investors can start accounts at her company with as little as $100, and that although, as a whole, African-Americans continue to he skeptical of the stock market, there is no reason to he if they have realistic expectations. "I try to help people understand what a wonderful opportunity it is if you have a long-term view about investing," says Frazier from her Wall Street office. "You can't get into it with a gambling-type mentality. The stock market is not gambling, it's an investment. You're not going to become rich overnight."

With a clearer understanding of why you should invest in the stock market, let's now clear lip questions you might have about how you would invest in the stock market. Let's say you are a nurse and you have $1,000 you want to invest. The first thing to do is call a financial advisor or stockbroker. After discussing your goals with him, he would probably explain to you that there are two main stock markets: The New York Stock Exchange (NYSE), which handles most of the Fortune 500 corporations, and The American Stock Exchange (AMEX), which historically has listed smaller companies or companies with less-active stocks. He will explain that there are also stock exchanges in such cities as Chicago, Dallas and San Francisco which trade mostly local stocks and specialty stocks such as cattle and grain futures. He may suggest that you pool your money with others and invest in mutual funds.

After hearing your options, you decide that because you are a nurse and you know a little about the health care industry, you want to invest in a health care company. Let's call it Company X. You know more and more businesses are switching to managed-care companies like Company X, one reason you believe they will continue to grow and earn profits in the future. Your financial advisor pulls out his newspaper and notices shares, or portions, of health care Company X stock, or ownership, sold for 9 3/4, $9.75 (getting the cents by dividing the bottom number into the top number), when the stock market closed yesterday. That's a pretty fair price since the newspaper shows that over the last 52 weeks those same shares sold for as high as 155 5/8 and as low as 6 2/3. Your financial advisor looks at the Standard & Poor's (S&P) 500 Index, which is a combination of 500 stocks and is the best indication of the market's overall health, and tells you it's a bull market, meaning the economy is good and the conditions are right for the stock market to continue to rise. He recommends you buy Company X stock, something he probably wouldn't do in a bear market, where conditions are unstable.

You give him your check for $1,000, he purchases 100 (100 x $9.75 = $975) shares of Company X stock for you, takes a $25 commission for his time, shakes your hand and tells you that you are now a stockholder.

Nothing, of course, is certain in this world and you can lose money in the stock market, but if you seek good advice and follow the rules, you can prosper.

Next month: How to follow your investment in Company X and other ways to invest in the market.

RELATED ARTICLE: INVESTMENT TIPS

* Set long-term investment goals

* Find a good financial planner

* Ask questions

* Be willing to take risks, but not too many

* Realize you're investing, not gambling