Last in a three-part series
The first two articles of this series have addressed some items pertaining to the nature of the stock market and equities and the broad basics of stock markets and trading. This article will address the “what, how and where” about actually investing — the “who does what, with which and to whom,” as I am fond of saying. It also contains some suggestions garnered from years of both good and bad experiences incurred by good ole Allen.
A common question is, “How do I go about buying stock?” That’s followed immediately by, “What should I buy?” First, we need to go back to basics, which is always a good philosophy in just about everything.
- Do not do anything until you have accumulated your reserve cushion, which should be in the form of cash or cash equivalents, such as certificates of deposit.
- Determine your long-term goals, and stay with them. Do you want to invest for retirement, children’s college expenses, building an estate for your progeny, etc.?
- Given solid answers to the above items, consult a professional adviser. There are myriad companies and individuals who offer these services. They advertise everywhere, and they are all not the same, even though most offer the same array of services.
Some notes on advisers:
- Most larger banks have financial services departments. A good bank’s offerings will include a “brokerage” division. A “broker” is a person who represents a buyer or seller in selling a product. That good bank will also have a financial adviser division. A financial adviser will meet with you, review your goals and present financial position, and develop an investment strategy for you and your family, or for your company. The brokerage department will then implement the strategy.
- Everything that I referenced about larger banks also can be found in individual advisers, corporate advisers, individual and corporate brokers, insurance companies and pension funds (for example, a representative of your 401(k) program, if your company has one).
Realizing the vagaries of the above, the major answer is to find someone you trust. In all commercial relationships, you should do business with:
(a) an individual whom you know you can trust.
(b) an individual who demonstrably knows his or her industry. If an adviser is not extremely knowledgeable in this regard, he or she cannot make well-informed recommendations.
(c) a company that can, and will, perform as its representatives said that it would.
If these three factors are in place to your satisfaction, you will not go wrong in choosing the correct financial adviser and those who furnish brokerage or other related financial advice, such as regarding life insurance, which is usually an important part of an investment plan.
We are inundated with advertisements for financial services. Although there is some regulation from licensing organizations and the government, there is a world of variance in fee structures, individual capabilities and personal service.
Research this carefully and make sure you are comfortable before beginning a relationship; you can usually change, but depending on the situation, there may be costs involved.
I strongly recommend that you not attempt to handle your market investment plan without good professional advice; the situation is too complex, and there are too many enticements to gamble. Speculation is fine if you are using “throw away” funds and want to play; do not try to “beat the market” yourself with money needed for your long-term goals.
Some other definitions that might be helpful:
- Mutual fund: a company that invests OPM (other people’s money) in an array of different stocks. There are many different types, depending upon your “risk appetite.”
- Risk appetite: How much risk are you willing to take on? There is a great difference in buying stock in General Motors or in a new mining company in Brazil.
- Option: the option to buy or sell at a date certain in the future; this may be for stocks or commodities.
- Commodities: generally agricultural related products, such as cotton, corn, wheat, soybeans, pork, chickens and beef.
- Hedges: future contracts for the purchase of stocks or commodities.
- Annuities: contracts for lump-sum payments to you over a stated future period.
- Transaction fee: the fee charged by a broker for each trade.
- Portfolio fees: fees based on the value of the portfolio; the broker makes less if your value decreases.
- Flat fee: The financial adviser or broker charges a set fee, regardless of trading activity and portfolio evaluation.
- Portfolio: the total amount invested.
There are too many more definitions to address here. Good hunting and good luck!
- Allen Wood Jr. is a seasoned Greenwood businessman. Send questions to him at excellententrepreneur1@gmail.com.
