The Handy Investing Answer Book. Paul A Tucci

are comfortable with predictability, and have a hard time getting used to new situations. If they grew up in an environment where there was never enough, and suddenly have a lot, no matter how painful, people will spend their money down to the level with which they are most familiar and comfortable. If you never had more than $500 in your checking account, and suddenly receive a $1,000 bonus, people without financial goals will find a way to spend that $1,000 down to $500, because they are more familiar with having no more than $500 in their checking account. A person committed to attaining a financial goal will get the money, put it away safely, pretend it doesn’t exist, and maintain his customary spending behavior. A goal-oriented person will change the way he views his checking account, and decide that having $1,500 is his new minimum balance. While the spender is spending the excess, the saver has changed his view of what should be in his checking account to a minimum of $10,000, and is setting aside this extra income to reach that new goal.

      So wealth creation is really about my thoughts?

      Yes, it doesn’t really matter what your background is, if you decide that it actually feels better to be independent and living debt free, you will begin to take the proper steps to make this happen. You will resist the urges to spend, in favor of a longer-term goal. If you tell yourself that it is OK to have $500 in your account, you will take steps to make this happen. If you tell yourself that it is OK to have $100,000 in your account, you will also take steps to make that happen as well.

      Where do the highest and lowest number of high net worth individuals live?

      According to the IRS, the states where the highest number of people with a net worth greater than $2 million live are California, New York, and Florida. The states with the lowest number of people with a net worth greater than $2 million live are Alaska, North Dakota, and Vermont.

INDIVIDUAL STOCKS: THE BASICS

      What are “stocks”?

      Stocks are a way to own the assets and earnings of a company. Companies that offer the opportunity for investors to own their stock place a value on the shares or pieces of the company based upon the value of all the assets of the company and the value of its past, current, and future earnings. A stock can be traded (purchased or sold).

      How do companies use the proceeds of a stock issue?

      A stock may also be created, and then marketed and sold, when a company wishes to raise capital or cash to help fuel its business development, to pay off loans and other debt, and perhaps to buy back shares from other investors at attractive prices. A company’s stock is originally valued when the company first begins, based upon its capital or cash and other initial assets.

      What is a “stock market”?

      It is a place—whether a physical building or an online virtual environment—where stocks are bought and sold. Stock markets or exchanges, as they are also known, can trade stocks, bonds, and derivatives of stocks and bonds, along with many other financial instruments.

      Which stock market opens first?

As the day begins in each part of the world, there is a flow of stock trading. The first of the major markets in the world to open are those in the countries nearest the International Date Line. New Zealand’s market opens first, followed by Sydney (Australia), Tokyo, Hong Kong, Singapore, China, Mumbai (India), and Moscow. Europe then follows, with Switzerland, France, Germany’s Frankfurt Exchange, and London, England. Then the North American markets open, in Toronto, New York, and finally Chicago.

      Does the stock market ever close?

      Because there are stock markets in many parts of the world, investors may trade 24 hours a day.

      What are the largest stock markets in the world?

      By far the largest stock market is the New York Stock Exchange, which trades $30 trillion worth of stock, followed by National Association of Securities Dealers Automated Quotations (NASDAQ) in New York ($15 trillion); London, England ($10 trillion); the Tokyo [Japan] Stock Exchange ($6.4 trillion); Euronext [Belgium, France, Holland, and Portugal] ($5.6 trillion); Frankfurt, Germany ($4.3 trillion); and Shanghai, China ($4.1 trillion).

      How many countries have stock markets?

      Stock markets are found in 77 countries around the world.

      The New York Stock Exchange building in New York was constructed in 1903.

      What are some of the pitfalls of buying individual stocks?

      Although buying individual stocks can be economically rewarding, many experts believe that for the individual investor there can be many factors that detract from whatever benefit we might enjoy. Acquiring individual stocks requires a great deal of time to do research to decide the safety of the stock. To have a diverse portfolio, you must have many individual stocks, and each needs to be researched and followed. It may take more time to do so than you have.

      What types of risks could I see if I own individual stocks?

      Inherent to individual stock ownership is the concept of various types of risks that must be understood prior to acquiring individual stocks. Broad economic risk may occur and temporarily or permanently depress a stock’s price after you purchase it. Economic risk could be the effects on the economy and the stock investing community’s perception from such events as high unemployment, lower than expected exports, a drop in consumer purchases or confidence, an abrupt devaluation of a currency, or an unexpected increase in interest rates, among many others. Industry- or market-specific risks may also negatively affect the price of an individual stock, as perhaps a game-changing introduction of a new technology, or availability of cash for consumer credit, may negatively affect a stock’s price.

      A change in government policies (political risk) may also cause a stock’s price to be depressed (for example, if the government decides to levy a tax or duty on the sale of a particular product). This may have both short- and long-term consequences. Materials and other input risks may influence the price of a stock, if the materials represent a rather notable component to the underlying product the company creates and sells. (Inputs are things used to make products, especially commodities like steel, copper, and petroleum.)

      As prices for such inputs increase, profits of the company may fall. If profits fall, influencing the stock price, the value of the shares may fall. Technology risks may occur, and may have an immediate or delayed effect on the stock price. An example could well be the effect of the usage and proliferation of the Internet, and the effect this has had on industries such as the video rental market, music industry, and book publishing industry. How the target stock’s competitors develop and innovate may also affect the price of a stock, as a competitor may develop and apply a manufacturing or logistical methodology that makes it far more competitive, and therefore relatively more valuable to the market, perhaps affecting the price of stock.

      Giant lawsuits may present legal risks, especially in such industries as finance, health, pharmaceuticals, and chemicals. An unforeseen lawsuit settlement may cause a company to file for bankruptcy protection, which would have an immediate effect on its share price. If a competitor to the target company attracts more competent management, or if the management of the target company is engaged in illegitimate activities, and less than competent management practices, these factors may also greatly influence the value of a stock.

      What other risks are inherent to individual stock or mutual fund investing?

      Many experts believe the most apparent risk of investing in an individual stock or mutual fund is market risk. Market risk occurs when the market in general does not move in the “right” direction. When this happens, there is a tendency for the majority of stocks—regardless how good—to follow in the same direction.