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Are you ready to ride a bull stock market?

Most folks would sooner roll the dice than place their fortunes in the stock market. After all, the market is synonymous with such words as "risk," "crash" and "wipeout," which may seem terrifying when uttered in the same breath money. But for patient long-term investors, stocks are a viable way to go. The Standard & Poor's 500 stock index (S&P 500)--a market barometer--makes the best case. According to the Chicago-based investment research firm, Ibbotson Associates, stocks comprising the S&P 500 have gained an average of 10% a year since 1926.

When interest rates fall, as they did late last year, the stock market is a hot rod compared to tis putt-putting competitions. By January, long-term treasury bonds were yielding just 7.6% and two-year certificates of deposit (CDs) were even stingier, paying a mere 4%. Investors who stuck with fixed-income vehicles ate the dust of stock owners who posted whopping gains of 30.5% in 1991.

In 1989, it was estimated that fewer than one in 10 middle-class Africans owned stocks, in comparison to nearly a quarter of their white counterparts. Anecdotal evidence suggests that our participation in the market today has hardly improved. "We're not comfortable taking risks with our hard-earned money," says Darrel D. Simms, author of Black Experience, Strategies and Tactics in the Business World (Management Aspects Inc., Beaverton, Ore., $19.95). Often the assets of African-Americans are tied up in immediate needs, such as housing and education. "Not long ago, I addressed a group of black bankers and not one owned any stock," says Simms. "Clearly, we're dealing with perceptions that need to be changed."

A Sure BET?

Joyce Wellman may reap the rewards of such a change. Until last fall, the 42-year old visual artist from Washington, D.C., had her $7,000 savings socked away into three stodgy, if relatively safe, investments--an IRA, a passbook savings account and an annuity. But in late October of last year, Wellman says she "came of age" when a friend urged her to buy the stock of Black Entertainment Television (BET). The Washington, D.C.-based cable network was offering its stock in an initial public offering (IPO) and takers were lining up. (See Cover Story, "Going Public!," this issue.) Wellman yanked $3,000 from her 5% savings account and sought higher yields.

Wellman phoned BET and received some literature on the company. She was then directed to Bear Stearns & Co., the New York City-based brokerage firm handling the IPO. After receiving BET's prospectus and discussing it with friends and colleagues, Wellman felt she was ready to invest. She called in an order for 175 shares--her first and only stock--which she purchased for $17 a piece.

It was a daring move for Wellman, but her plunge into the market was hardly impulsive. Wellman didn't know much about picking stocks, but she did learn enough about BET to invest. More importantly, the artist wasn't out to make a quick buck. With an income of $25,000 and no pension to cushion her retirement, she was willing to take a risk with her savings. When the BET stock spiraled downward to $15 and other investors began to bail out, Wellman didn't budge. The self-described hunch-taker wisely bought more shares at the bargain price.

Her investing style may be aggressive for a beginner, but by hanging tough in the market, Wellman got the right idea. "The challenge now is to create a good balance with the rest of her portfolio," says Robert Rinfrow, a financial planner with IDS Financial Services in Columbus, Ohio. While it took her 20 years to make the move into stocks, Wellman is now eyeing other investments, including stock mutual funds.

Many financial experts advice novices like Wellman against dabbling in individual stocks. Their logic? Stockbrokers generally trade issues in lots of 100 or more. So to achieve proper diversification--that is, to spread your risk among several different types of stocks--you'd need a minimum ante of $25,000. "Investors just starting out usually don't have the kind of money," says John Markese, director of research at the American Association of Individual Investors in Chicago. "And putting you resources into just one or two stocks can be a huge, costly mistake."

But with today's battered bank rates, "asking small investors to shun stocks completely is the worst piece of advice one could give," insists Thomas O'Hara, president of the National Association of Investors Corp. in Royal Oak, Mich. "With some careful thought and analysis, individual investors can do quite well in the stock market. And since it's their own money at stake, they may even beat the pros at their own game."

Though some experts might disagree, the fact remains that stocks historically have offered the greatest gains of any investment. For would-be investors who want to take a ride in the stock market, here are a few tips before boarding.

Stocks: The Risks And Rewards

The typical response for most people when they find out they have a little "extra" money is to spend it. Those who manage to fight this temptation, might invest it. Unfortunately, many first-time investors misleadingly chase after get-rich-quick schemes. Before buying stocks--or any investment for that matter, first check out your present financial status.

What a person wants to invest is not the same as what the person must invest. Only after assessing your net worth (assets, liabilities and future cash needs(), can one answer the question of 'how much money do I reasonably have to invest?' It is also important that novice investors understand the relationship between risk and reward: the greater the risk, the greater the potential return on an investment. Stocks offer two kinds of returns: cash dividends and capital gains. Cash dividends are part of a company's after-tax earnings that are distributed to stockholders.

By purchasing stocks, you become part owner of a company. This ownership is referred to as having equity in a company, hence, stocks are called equity securities. As a stockholder, you'll share in its earnings during profitable times and suffer a loss when business hits the skids. A company will thrive under the best conditions, driving the price of its shares up. Capital gains (profits made from an increase in the market value of the company's stocks) are the primary payoff.

Stock prices are driven by a set of economic factors, such as inflation, interest rates, supply and demand, and business cycles. Less tangible factors--industry rumors--also contribute to the hand-wringing among analysts. As of the first quarter of this year, stock prices were at their highest level since 1968.

Should this be a red light to new investors? No. Charles Carlson, editor of the Hammond, Indiana-based newsletter, Dow Theory Forecasts, warns novices against trying to time the market. There's really no right or wrong time to enter the market. "Even when prices are relatively high, you can still find value."

Getting Your Feet Wet

The kind of stock you purchase will depend a great deal on your investment objective. For example, are you looking for long-term growth and capital appreciation or income? For many would-be stock owners, the biggest barrier to getting started is sheer numbers. If you were to plan by the average broker's rules, you'd be locked into buying shares in lots of 100. That's roughly $3,000 a shot for a single holding. Should you decide you want shares in 10 or more companies, except to pay $25,000 and up.

As a beginner, you should go for quality, not quantity. One way to get premium stocks cheaply is to buy "odd lots"--any number of shares under the typical 100. Investors who acquire just 40 or even 20 shares can diversify without spending a wad of cash. "An initial investment of $1,000 is enough to get started," says Geraldine Weiss, editor of the stock market newsletter, Investment Quality Trends, in La Jolla, Calif. There's one small catch: Brokers will charge you an extra commission fee (about 12.5 cents on the dollar) for moving tiny lots. Or, if the stocks are super cheap ($20 or less), investors might pay a minimum commission of $50. Such rates may at first seem steep. But, says Weiss, "those amounts are negligible" if you plan to hold on to the shares long-term.

Some brokers encourage this strategy. Gail Perry-Mason, a financial adviser with the full-service brokerage firm Prudential Securities Inc. in Detroit, recommends and sells odd lots. Why? Because those pint-sized accounts will one day blossom into giant portfolios.

Planners say you'll get the best results from the market by investing regularly. This not only means buying more shares of stocks. You can also reinvest your earnings. If you purchase $500 worth of the same stock each month, this is known as dollar cost averaging. This strategy allows you to obtain more shares when the stock is cheap, and fewer when prices are inflated.

By leaving your profits untouched in you account, you reap the benefits of compounded earnings. Charles Carlson gives this example: If you invested $10,000 PepsiCo back in 1965 and reinvested all dividends, your stock portfolio would be worth more than $400,000 today.

Even if you pocket your dividends and only accumulate capital gains you can achieve astounding returns. Back in 1977, Ann and Lucius Jones of Detroit invested $2,000 in a lone over-the-counter stock, Patrick Henry National Bank in Martinville, Pa. The couple, now ages 51 and 65, respectively, purchased 200 shares and within two years, they received dividends of $30 percent quarter. Fifteen years later, Ann, who works at Ford Motor Co., and Lucius, a retiree from General Motors Co., pocket quarterly dividend checks of $257. They now own 1,260 shares.

The couple's eldest son, Dr. Carlos Jones, is an aggressive investor. The 32-year-old Detroit dentist started investing in various vehicles in 1988, just a year after graduating from Howard University's dental school. "I needed another way to make money besides working," he explains.

He initially invested a piece in the Shearson Lehman Aggressive Growth Fund and Calvert-Ariel Growth Fund. "Prior to that I just bought savings bonds." The following year he bought stock in TCYB (a Little Rock, Ark.-based yogurt franchise company) and Charlotte, Mich.-based Spartan Motors.

A day or so after BET went public, he bought $6,500 worth of stock at $23.50 per share. He currently has $10,000 in U.S. government bonds, another $10,000 in Twentieth Century Ultra and $3,000 in the Gabelli Growth Fund.

The Professional Touch

Once you've nailed down the basics of investing in stocks, you may choose to move on to even riskier territory. There are other ways to purchase company shares, for example, through global stocks, stock options and dividend reinvestment plans. Perhaps, the safest and easiest way to invest in stocks is via stock mutual funds. To buy most stocks, you'll need the services of a broker, a licensed professional who can execute trades on any exchange.

Brokers come in two stripes: full-service and discount. The advantage of full-service brokerage firms, such as Dean Witter Reynolds Inc., Shearson Lehman Hutton Inc. and Merrill Lynch Inc., is that they practically hold your hand. They'll call you with the latest hot tips and pass along buy-and-sell recommendations from their in-house stock analysts. Expect to pay commissions of between 2.5% and 3% per transaction. Moreover, because full-service brokers earn their salaries this way, they may learn on you to trade more frequently than you desire.

Discount brokers make less of a dent in your profits, sometimes charging only half as much as full-service brokers. But remember, they're strictly no frills. Discount firms, such as Charles Schwab & Co., are there only to make trades. Sifting through the stock's prospectus and performing other investment research is up to you .

When To Hold 'Em And When To Fold 'Em

For investors thinking long-term--as well they should be--the holding period for stocks might be at least four years. A 1991 survey of the American Association of Individual Investors' 125,000 members revealed that the average number of years investors hold onto their stocks is 4.2. "Investors should determine ahead of time how much loss they can take and still sleep well at night," says IDS Financial Services' Robert Rinfrow. A reasonable return on your two-to-four year investment might be about 25% to 40%, says Rinfrow. You may wish to get out if your stock dips below 30% of the price you paid.

Of course, these figures are not etched in stone. Set personal benchmarks based on risk tolerance and then stick with them. "Take your profits or accept your losses, then don't look back," advises Cheryl D. Broussard, an investment adviser and principal of Broussard & Associates Inc. "A stock may continue to go up, but don't be greedy." If the stock shoots down after you dump it, you can always purchase mare shares at the lower price.

Still, many new investors think they can outsmart the market in short-term trades. The idea is to buy a "hot" stock as it builds momentum and quickly cash out upon its ascent. It's possible to male a killing this way.

But if your stock doesn't perform as planned, the result can be devastating. If a stock drops by 50%, it must recover by 100% just for you to break even. For example, if your $5000 investment is clobbered by a 50% price drop, you're stuck with just $2,500 worth of stock.

Learning To Pick The Best

To get a running start on choosing the right stocks, first set down some honest goals. How soon will you need access to your capital? What is your investment objective?

"A lot of people say their investment horizon is two years," say investment adviser Broussard, "when they really mean six months." Once you've determined the type of stock you're after, use some common sense. Look for a stock that has a story: What is the company doing? What products are they bringing to market? What's the outlook for them to increase profits?

You then need to look at the complete economic picture. In what industries are the stocks you own or plan to buy? Would you be terribly vulnerable if that industry faltered? By spreading your resources among several fields, you're controlling your overall risk. To reduce your exposure, have no more than 15% of your holdings in the same industry.

The more difficult task, though, is determining the risk level of a particular stock as compared to the market. The easiest way to do this is to check out a stock's "beta." This figure measures volatility. The S&P 500 is assigned a beta of 1.A stock with a beta of 1.5 is 50% more volatile than the S&P. One with a beta of .50 would be 50% less volatile than the index.

Just how good a buy is a stock? To answer this, seek out companies with good financial muscle. Established companies should be lean on debt, with long-term IOUs comprising no more than half of total capital, say experts. These figures can be found in the company's most recent annual report or S&P stock reports.

You can also tell if an issue is a bargain by comparing its actual price to its so-called book value--an expression of price relative to the company's assets. Most stocks trade at about twice their book value, so any issue that sells for less than that is generally considered cheap.

Another yardstick is the price/earnings ratio (P/E), which is the price of the stock divided by its earnings per share. This number gives investors an idea how much they are paying for a company's earning power. The higher the P/E, the more investors are paying, and the more earnings growth they are expecting.

Time and time again, stocks will reach all-time highs or sink to record lows. Either way, history teaches that whether you're in your 20s, middle-aged or nearing retirement, not investing in stocks puts your financial well-being at greater risk than investing in stocks wisely.
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Branch, Shelly
Publication:Black Enterprise
Date:May 1, 1992
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