Is It Wise to Invest in the Stock Market?

“Record numbers are now playing the market.”—Newsweek, July 5, 1999.

THE floor of a traditional stock exchange seems to be a chaotic marketplace. Mysterious (to an outsider) hand signals are employed, coded messages on electronic tickers appear and change at a frantic pace, and floor brokers compete to be heard above the flurry of activity.

Today, however, many people once bewildered by the stock market are investing in stocks. Why? For one thing, the Internet has enabled investors to access in moments financial news, investment advice, and stockbrokers. Paul Farrell, editor in chief of Wall Street News, writes: “For [individual investors], cyberspace investing is the new frontier, the new gold rush, the freedom to be yourself, with the opportunity to become financially independent while working at home.”

On the other hand, some financial advisers are alarmed by the eagerness of many to invest in a market that they may know very little about. One investment dealer with over 38 years of experience in the securities industry told Awake!: “More people are buying into the stock market as speculators, not investors. Some may call it investing, but they don’t know anything about the company [whose stock] they are buying and selling.”

What factors should you weigh before investing your money? Since a measure of risk is involved with the trading of stocks, is it gambling? First, let us consider how the stock market operates.

Buying a ‘Piece of the Pie’

Companies need capital, or invested money, to operate successfully. When a company prospers and requires a large amount of capital, its management may choose to offer shares of its stock to the public. One guide to the stock market illustrates it this way: “Stocks are pieces of the corporate pie. When you buy stocks, or shares, you own a slice of the company.”

At a street market, buyers and sellers meet and conduct business. Similarly, the stock exchange is a marketplace for those who buy and sell stocks. Before the development of the exchange, stocks were traded through brokers at coffeehouses and on the roadside. Trading under a buttonwood tree at 68 Wall Street led to the formation of the New York Stock Exchange.* Now there are stock exchanges in many countries. On any given business day, at any hour, there is a stock market open somewhere in the world.

To trade stocks, an investor usually opens an account with a broker and places an order. Today orders to buy or sell stock can be placed over the telephone, through the Internet, or in person. The broker then needs to execute the order on behalf of the investor. If the stock is traded on a traditional trading floor, the brokerage office directs one of its floor brokers to buy or sell stock for the investor. In recent years some exchanges have adopted a completely electronic trading system, where trades can be made seconds after the order is placed with a broker. Trades are then recorded on stock quotations—current prices and trading details displayed on an electronic ticker.

The price at which stocks are bought or sold is usually determined by competitive bidding, as at an auction. Business news, company earnings, and the future prospects of an enterprise can all influence the price of a stock. Investors hope to buy their stock at a low price and sell their shares for a profit after they increase in value. A portion of the company’s profits may also be divided among the shareholders as dividends. Some people buy stocks as a long-term investment; others trade stocks regularly, hoping to profit from stock prices that rise dramatically in a short time.

While the trading of stocks has traditionally been done over the telephone, on-line trading (buying and selling stocks over the Internet) has become increasingly popular. The Financial Post reports that the number of on-line trades in the United States “increased from about 100,000 per day in 1996 to nearly 500,000 by the end of June [1999] with nearly 16% of all trades in the United States done electronically.” In Sweden some 20 percent of all stock trading in 1999 was done over the Internet.

Invest Wisely

The apparent ease of trading stocks on-line and gaining access to information previously reserved for brokers and professional traders has prompted many individual investors to take up day trading, the buying and selling of stocks full-time. Some have given up lucrative careers to become day traders. Why? “The allure is obvious,” explains Money magazine. “No bosses, complete control over how and when you trade and the potential—or so it seems—to make a lot of money.” One 35-year-old man who quit his $200,000-a-year job to trade stocks at home is quoted as saying: “How else can you have no inventory and no employees, pay no rent, tap-tap-tap on a keyboard and make a living?”

Experts warn that trading stocks is not as easy as it may seem to a new investor. One psychiatrist who specializes in the stresses of trading observes: “Trading seems deceptively easy, but I like to say that it’s the hardest way to make an easy dollar.” The endless stream of financial news and advice has not come without side effects. Paul Farrell, quoted earlier, notes: “The relentless thrust of information racing at lightning speed at the individual players—both the individual investor and the institutional trader—is having a major psychological impact: rattled nerves, frustrations, stress.”

Overconfidence can also be a snare. Financial columnist Jane Bryant Quinn warns of dangerous attitudes among traders: “You think that if you’re at the helm—or at the mouse—bad things can’t happen. You’ll always be able to intervene in time.” She adds: “Because we can access information used by pros, we start to think that we’re pros, too.” Despite the widely publicized stories of investors who have become rich overnight on the stock market, the trading of stocks carries inherent risks. Some investors have been very successful. Others have suffered significant losses.

Investment advisers urge potential investors to consider a company’s past record and future prospects, the demand for its products, competition from other businesses, and several other factors before selecting a firm’s stock. This information is often available through stockbrokers and other financial institutions. Many investors consult with financial planners before purchasing stock.* By considering the background of a company, an investor can also ensure that his money will not be used to support an unethical enterprise.—See Awake!, February 8, 1962, pages 21-3.

A Corporate Lottery?

In view of the risks associated with the stock market, is buying stock the same as gambling? A measure of risk is involved in nearly all financial investments. Some people buy real estate, not knowing if the value of a property will increase or decrease over time. Others deposit their money in a bank, trusting that their savings will be secure. While the stock market is more complicated, simply put, one who invests in stocks buys the shares of a company in the hope that the enterprise will prosper and the stocks will increase in value.

Such an investment differs from gambling because the stockholder has purchased part of a company. These shares may be sold to another person or saved in the hope of future growth. This cannot be said of a person who bets money at a casino or on a game of chance. Against the odds, the gambler seeks to predict an uncertain outcome and win the loser or losers’ stakes.

How much risk should an investor accept? That is up to each individual to decide. Of course, it is not prudent to risk more money on an investment than one is willing to lose.

A Balanced Attitude Toward Money

In a desire to provide for their immediate and future needs, some have decided to invest in the stock market. One’s motive for making such financial decisions is important. Jane Bryant Quinn, quoted earlier, states: “Envying the undeserving rich can bring out our worst instincts as investors.” Those words seem to echo the advice given in a letter written to a young man almost 2,000 years ago: “Those who are determined to be rich fall into temptation and a snare and many senseless and hurtful desires, which plunge men into destruction and ruin. For the love of money is a root of all sorts of injurious things, and by reaching out for this love some have been led astray from the faith and have stabbed themselves all over with many pains.”—1 Timothy 6:9, 10.

How a person chooses to invest his money is a personal decision. Guided by a sound mind and contentment with the necessities of life, an investor does well to keep financial concerns in their place, not neglecting his or her family responsibilities and spiritual needs.

[Footnotes]

The term “Wall Street” now frequently refers to the financial markets in general.

Not all advice is sound. Investors should be aware that a financial planner or a stockbroker may be merely pitching his own services or manipulating his customer for profit.