One of the refrains heard now is that this is the time to get into the stock market. Stocks are undervalued and destined to rise, or so analysts and investment advisers say.
For many individuals, the stock market is uncharted territory. Walking in is a little scary. The Washington Post talked to four investment specialists in this area seeking guidelines on what an investor should know about buying stock -- what questions a smart shopper should ask about stocks.
The four specialists were Bob Long of Ferris & Co., Julia Walsh of Julia Walsh & Sons, Les Silverstone of Dean Witter Reynolds and Wendie L. Wachtel of Wachtel & Co.
The following questions and answers about buying stock reflect that information.
Q: Where does an investor begin to find out whether to buy stocks and which stocks to buy?
A: Begin with your own finances. Assess your financial assets, your prospects for the future, your tax status and your financial needs. Do you need income now, a tax shelter, an investment that promises growth in the future or a combination of these? Having done that, begin to look more closely at stocks and whether they meet your needs.
Q: How much money should I have to get into the stock market?
A: The answers range from $1,000 to $10,000. Generally investment brokers suggest that if you have less than $1,000 to invest or are in the lower end of the range, you will do better to invest in a mutual fund.
A: Because most investment brokers counsel diversity. With limited funds, it is hard to buy enough stocks to diversify investments and spread risks without spending a disproportionate amount on commissions.Mutual generally provide lower risk and professional management although mutual funds range from conservative to speculative.
Q: How do I research stocks?
A: On your own, once you have identified areas in which you may want to invest, you can identify individual companies and write for annual reports. If a firm files with the Securities and Exchange Commission, a prospective investor can also ask for copies of reports filed with the SEC. Stock brokerage firms usually have research departments that try to pinpoint areas of growth, asses the direction of the economy and its impact on stocks and provide information on individual companies to prospective investors.
Q: How do I find a broker to talk to?
A: When you walk into an investment firm, ask for the manager. The manager can get a sense of what type of investment you are seeking and match you with a broker who matches your needs. If you just walk in off the street and ask for a broker, you will end up with whoever is on duty. That may, or may not, be the right broker for you.
Q: How can I evaluate a brokerage firm?
A: One measure is something called 'the recommended list." These are tables of stocks the firm has recommended. You can find out how the firms's recommended stocks performed against benchmarks such as the Dow Jones averages. On the other hand, the lists are not always independently audited, and one year's performance does not guarantee the next year's.
Q: What can I expect in a relationship with a broker?
A: First, that he or she will ask detailed questions about your finances. Prospective investors sometimes birdle at these questions, according to brokers, but they help the broker aid an investor in finding the type of stock the investor needs. You should ask the broker what follow-up services he or she will provide -- for instance, whether you can expect a call if the stock rises or falls significantly.
Some of the other advice brokers offer about dealing with their profession is common sense. The more polite and congenial you are to a broker, the better the service you are likely to get in the long run.
You may simply choose to treat the broker as an order-taker rather than someone on whose advice you rely. But since you pay a commission, you might want to get all the services for which you pay. Commissions vary depending on the price of the stock and other factors. Generally they range from over 10 percent for stocks under a dollar to 1 percent or more for stocks over $100 a share. Commissions are part of the cost or the proceeds and are paid at the time of transaction.
Besides traditional brokerage firms there are also "transaction specialists" -- basically discount brokers who place orders at lower costs but provide few other services. If you know what you plan to buy or sell and want to do it without frills, you can save money with a discount broker.
Q: What do I need to know about individual stocks before I invest?
A: Know the risk. Ask what is the worst that can happen if you invest in a stock.
Look at the balance sheet and determine the net worth per share -- the net worth divided by the number of shares outstanding. Contrast the earnings per share to the price of the stock to determine whether it appears to be undervalued or overvalued by the market. For instance, if earnings per share are $14 and the stock is trading at $60, it may be undervalued by the market. A rough rule is that anything selling for less than five or six times earnings is reasonably cheap. Look at how much debt the company is carrying and whether it is short-term or long-term. Heavy indebtedness may mean higher risk.
Look at the company and what it produces. How has it grown in the past and what is the outlook for future growth? Is it in an industry with potential? Does the company have potential? Why? Is it well-managed, or in an expanding marketplace? How does it compare in earnings and sales with its competitors?
Q: Are there any things to look for particularly in this economic climate?
A: Many investment brokers counsel investing in companies with tangible assets -- such as land or minerals -- in a time of rapid inflation. The idea is that the value of the assets will rise with inflation and offset depreciation in currency.
Most brokers -- who depend for a living on people's willingness to invest -- feel that now is a good time to get into the market. Stocks have not appreciated in line with inflation during the past decade, and the market is full of good buys, they say.
Q: What should I look out for?
A: Your own natural tendencies. Most people jump on a stock when it is looking good and jump off when it looks bad. Being a successful investor means retraining yourself -- buying when the market is low and things look bleak and selling when the market is healthy and the company looks good.
Of course, the hard part is determining whether a low-priced stock is undervalued or a real lemon.That's what makes it interesting.