Basic Investing Question

It is most likely an inexpensive bet, and that is also very important over time. Index funds tend to have a low expense ratio, and they tend to be very tax efficient.

There is a huge different between investing in the market and investing in an individual company. When you invest in the market, your risk is spread across many companies and many industries. You give up the chance for spectacular events like doubles and triples, but you do get good steady rates of return over time.

Investing in individual companies is more like speculation. You can hit a home run, or you can strike out. Without some inside information, it is a real crap shot, but using inside information is illegal, so you are totally at the mercy of the corporate PR staff, which has proven to be iffy at best over the past decade.

Investing in individual companies is difficult and expensive. First off, you have to pay commissions both on the way in and the way out. That means that you have to put a healthy sum of money into each company to minimize the impact of the commissions. Second, you have to invest in perhaps a dozen companies to get meaningful diversification. That often takes more money than what a younger investor has available.

I'd suggest investing in the market, and maybe use only a small part of your portfolio (5%) to take some flyers on individual companies.

What you are missing are goals. What are your goals in life? What investing goals do you have to support those life goals. Investing for the sake of investing is nothing more than watching a number grow slowly over time. You need to figure out what your retirement timeline is, and how you fund it. Then fill in the gaps in between with a toy or two, or a lifestyle choice, and fit in a house, kids, college, etc. You want to be investing for something, not just investing for the sake of investing.

-john-

I think you need to understand the big picture of "Why buy stocks?" The most popular answer is that, historically, they have been the best place to sock one's money for the long term in terms of returns and risk.

It's not at all just about dividends. Some companies may not pay a dividend in your lifetime, yet owning their stocks will enrich you many times over. Or some may cut their dividends. Generally speaking, stock prices (and so the value of your investment in the same) rise because company earnings rise. Company earnings tend to rise because of inflationary effects; population increases; increased share of the market for the product; etc.

For a quick introduction that will likely get you thinking, I recommend the following three sites:

(about historical stock market volatility in the short and long terms)

(has links to free online asset allocation tools, which are quick and dirty to use, showing the emphasis put on stocks for the long run, based on historical returns) (article "What Good Are Stocks?"; what it means to own stock; etc.) wrote

Most people invest /for retirement/. In retirement, they start shifting from stocks to bonds/CDs, and start taking money for themselves.

You invest with a goal. Retirement is a common goal, others may chime in other "goals" suitable for stock market investing.

So the day I retire is the day I start withdrawing some of my earnings and investment dollars. There could be LOTS of theoretical discussion on when you have enough to retire... my simple basic calculation is income/4%. This implies if you have an amount invested which allows you to withdraw 4%, and the 4% is enough to live on, you are close to being ready (financially) to retire.

Kareem - I am glad that you are taking this so seriously because it is your money and you will care about it more than anyone else.

Investing in the stock market can be very complex in theory yet so simple in process. What I mean is you can open an account and buy a stock rather easily. The complex part of it is researching and coming up with a method that fits your personality, beliefs, goals and values. Most people skip over finding a strategy that fits them. This is one of the most important steps. Trust me. I have used a system only to not be content with the returns, the length of trades, the stock selections, etc. Find what works for you and you are happy with.

I do agree that an index fund is a great idea. Index funds are well diversified and work great over the long-term 5-10 year range where you can weather the bear markets (I.E. the famous bear market of

2000-2002). I have studied and testing the stock market for over 20 years. I say this not to impress you, but to validate what I am saying. I believe that investing with the market is the best way to be wealthy. Investing in the market might mean that you will be in cash during bear markets or better yet shorting the market. Bear markets do come around and each person needs to make their own judgement call on whether they are comfortable watching the markets drop and doing nothing about it.

This is a lot to take in so take your time and do some research. The one thing that is great is that you are starting so time is on your side.

Keith

That's a safe bet if the index is broad enough and you won't need to get at your investment in the next 3 years.

You need to be diversified when investing in individual stocks, weighting the large companies more than the small. Don't pick an individual company and keep on plowing your money into the stock of that company. And diversify over the economic sectors, you won't be safe just buying auto stocks.

Although dividends are an indication a company is making money, they can be an indication that the company doesn't have a way to make itself grow.

What makes a company great is earnings, particularly if those earning are consistent and growing.

The idea is to die broke. So pick an income that corresponds to the lifestyle you want and save until your pension and investments yield that much.

-- Ron