The Handy Investing Answer Book. Paul A Tucci

storms or declines in the market and keep a long-term view.

      Why are people afraid to invest?

      Most people fear investing because they lack knowledge about investing, don’t know how to manage the risks, and hear and read about various crashes in the markets that happen periodically, which can cause people to lose a lot of money.

      What are some of the biggest mistakes individual investors make?

      People investing in the markets typically sell when the price is low, during or at the end of a notable decline, out of panic. And they may buy at the highest price, once they discover a new investment they hear of from their friends, who heard it from their friends, and so on. Or they buy when the markets are reported by various media outlets to be at their all-time high. By the time the news reaches you, it is probably long past the time to have invested.

      What are some other mistakes that investors make?

      Investors often make emotional decisions about owning investments, perhaps by refusing to sell the stock of a company because a relative worked there, or being afraid to sell a stock because of losing a certain amount. If the investor had sold it, he may lose less than if he had kept it, but because of emotions, the investor holds on to it, hoping the price will go back up.

      What types of investment or financial products exist?

      There are many different financial products, mostly divided into one of these broad categories: stocks, bonds, and cash. In addition, there may also be real estate, insurance policies, private equity ownership, currency trading, and hybrid investment products that combine the benefits of a mixture of these and other investments.

      What are some of the most important investment types?

      Some of the most important investment types include: emerging market stocks; foreign stocks; U.S. stocks; precious metals; commodities; high yield corporate bonds; municipal bonds; cash; treasury bills; money market funds; U.S. high quality bonds; European bonds; global bonds; and long-term U.S. government bonds.

      What is a “portfolio”?

      A portfolio is a mixture of investments of different types and risks that an individual or institution may own in hopes of making more money over time. It is generally defined as the collection of investments held by an individual, investment company, or mutual fund.

      What is “diversification”?

      Diversification is the act of making investments in different categories with the hope and expectation that the risk of losing money is spread out or diversified within the portfolio, thus reducing the overall risk of losing money on the whole portfolio.

      How does diversification reduce my risk?

      Diversification reduces your risk because when you have a variety of investments in a portfolio, the fluctuations in the value of any one investment have less of an effect. If you have several uncorrelated investments, you may minimize the risk of losing money.

       What does the saying “Don’t put all your eggs in one basket” mean?

      It demonstrates the need for diversification. If you put all your investments in one stock, and the stock price falls, you lose a major amount of money. If you had put your money in three different stocks, and two of the three go up, and only one goes down, you could still have made money, or perhaps lose less money than if your investment was concentrated in one stock.

What is an “individual investor”?

      An individual investor is a person who directly or indirectly purchases stocks or bonds, and invests in the market on his own account.

      How many individual investors exist in the United States?

      It is very difficult to estimate the precise number of individual investors in the United States because so many people invest in the markets in some way: by having retirement funds; buying individual shares of stock in a company; keeping money in a money market fund, which, in turn, invests the money; owning mutual funds; and payment of insurance premiums. All told, there are most likely more than 200 million Americans with some exposure to the financial markets.

      What is an “institutional investor”?

      An institutional investor is a large organization that pools money together with other large organizations, as well as individuals, and invests this money in private and public companies.

      Who are these institutional investors?

      Institutional investors can be commercial banks, investment banks, mutual funds, pension companies, retirement fund companies, and hedge fund companies.

      Why is it good to be an institutional investor?

      Because of their size, institutional investors can obtain a better price for the shares they buy. They trade in huge volumes of stock, both buying and selling, and their effect can swing stock prices at any moment during the day. Institutional investors also can command the best price when they are interested in selling their positions because they hold so much of a particular stock.

      What other benefits do institutional investors have?

      Because of the magnitude of the number of shares they own, institutional investors’ positions can allow them to have management say in the direction of a company, and they are occasionally given a seat on the boards of both private and public companies they may own.

      Bear markets are protracted periods of time in which stock prices go down.

      What is a “bear market”?

A bear market occurs when there has been a decline in a stock market average of 20% from a high, and is often characterized as a period of time when stock prices are in a state of decline, reported profits of listed companies are less than expected, inflation is increasing, interest rates are relatively high and increasing, and money is flowing out of the stock markets.

      Why do bear markets happen?

      Bear markets happen for many reasons. According to many experts, bear markets occur because investors are pessimistic about where the economy is headed, causing the declines to sustain themselves over a long period of time. Investors sell their shares, anticipating losses, and other investors see more losses in their portfolios, so they sell also. During bear markets, capital may be sidelined, or may be directed toward other investments such as bonds or cash in expectation of a signal to return to the equity markets.

      What duration of time defines a bear market?

      A bear market is a period of time in which the prevailing stock prices trend downward by more than 20% for at least two months.

      What is a “correction”?

      A correction occurs in the stock market when the trends of indexes show a decline in prices of 10–20% over a short period of time, from one day to less than two months.

      Are corrections good for some investors?

      Some investors look at corrections as buying opportunities, as often overvalued stock prices are reset to a lower level, representing their true value, and giving investors an opportunity to buy at a lower price. These same investors will typically have ready access to liquid assets, such as cash, in order to take advantage of the perceived bargain during a correction.

      What are some of the greatest declines of the Dow during a bear market?

      In October 2007, the Dow entered a bear market that lasted 517 days, and saw the DJIA decline by 53.9%. By contrast, the initial 1929 Dow crash, that heralded the Great Depression, saw a decline of “only” 47.9%, and lasted 71 days.

      Periods of stock market prosperity are called bull markets.

      What is a “bull market”?

      A