Evaluating Your Financial Position When Preparing To Invest

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One point should be made clear at the outset: you don’t have to be wealthy to invest. Among outsiders you can hear it said that stock ownership is a rich man’s game. This can mean any of several things: that the market is too complicated for the little man, that brokers aren’t interested in small orders, that only the person who can lose a bundle without feeling it should invest. However persuasive these arguments, they are all untrue.

The fact is - according to a recent New York Stock Exchange Survey - that almost half of all shareowners are in the $5,000 - $10,000 a year income bracket. The median income of the 3,860,000 people who have become stockholders since 1956 is $6,900.

This would seem to suggest that an understanding of market operations is not too difficult to acquire, and that an attentive, interested broker is not too hard to find. It can also be assumed that these are shareowners with a fair appreciation of the value of a dollar and in no position to laugh off losses.

The goals a small investor can hope to achieve and the pattern of investment possible within the limits of a modest income will be outlined further on. The conclusion to be reached here is that investment is not a matter of enlarging a fortune you already possess, but of making available some money, however small the amount, to start with.

Regardless of your salary or income level, investment is possible if three conditions can be met:

If you are assured of a steady income.
If you are meeting your current running expenses and obligations.
If you have a cash reserve with which to meet unforeseen emergencies.

These conditions are, first of all, safeguards made necessary by the inescapable fact that stock prices fluctuate. Your judgment of when to buy, when to sell, and how long to hold should never be dictated by outside circumstances.

Investment should be undertaken only with funds you can honestly and legitimately earmark as extra. With a regular income and your monthly bills paid, you know where you stand and what amount can be put aside, in reserve, for any investment opportunity that arises. Or, of course, for emergencies.

A sudden demand for ready cash - to pay a hospital bill, an insurance premium, or your income tax - should come, if possible, from your reserve, not from cashing in your investments. Whether your stocks are up or down, you are likely to take a loss - on the downswing because you may be selling at less than you paid, on the upswing because you may be selling at less than the potential.

Finally, a reserve permits investment over a period of time rather than all at once. As you learn more about the market, you will hear both sides of this argument.

Some experts feel you should back what seems to be a good situation with all the investment funds at your command. Others will warn against getting greedy, and advise partial investment here and there, at different times, to spread the risk.

This is not the place to discuss the merits of these techniques. The point is to give yourself the flexibility of moving either way your judgment dictates.

Remember: your income need not be large, so long as it is regular and enables you to put aside a surplus after you have taken care of your bills and the possibility of trouble.

The surplus need not be large, either. Saving, as has been said many times, is a matter of regularity. No one considers $5 too small an amount to put into a savings bank; don’t worry if that’s all you can save each week for your accumulating investment reserve.

In most markets, brokers usually can suggest a number of sound, solid stocks, offering liberal yields, which sell for less than $20 per share.

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October 07 2007 09:39 pm | Stock Market Investing Tips

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