Making Sense Of Stocks

You can't build serious wealth without owning shares in the market. Here's all you need to get started.

husband, Talbert Townsend, was about to head back to school to finish up an engineering degree. And her son, Cameron, was on his way.

Creuzot steered Davis-Townsend into a few mutual funds as a base, taught her the basics of investing, and told her to hold off on buying individual stocks for a little bit. In the meantime, Davis-Townsend and her husband started reading up. They have friends who invested in technology companies like Qualcomm and Dell, who’ve done quite well. Then, whenever she goes in to [the hospital] to perform surgery, the television in the doctors’ lounge is tuned to CNBC, and Davis-Townsend gets a dose of financial news throughout the workday. Finally, her husband has taken to hunting through the papers for companies that might make good investments. “He reads the Houston Chronicle daily … he looks for stock ideas, reads up on mergers, and sees how some companies are growing and changing,” says Davis-Townsend.

“I’d say we’d like to buy a stock soon, just to get the experience,” says Davis-Townsend. “And now that we’ve studied up and have a pretty good foundation, I feel good about it.”

Two Ways Stocks Make Money
Stocks offer investors two ways to grow the money they earmark for retirement or college tuition or the down payments for new homes. First, they rack up capital gains, the appreciation share prices make over time as determined by the stock market. Second, if a company shows that it can not only make a healthy profit but also increase the amount of money it makes year after year, investors will bid its share price ever upward. If you own that same company’s shares, that means you’ll likely see the stock go up in value. It also means you could well opt to sell your stock later at a profit, a capital gain.

Often, as a shareholder, you’ll find that you’re also in line to receive another bonus of sorts, too, called a dividend. Stock investors get dividends when companies opt to carve out a certain portion of profits to share with shareholders. It’s a sum that tends to come regularly every quarter, and is preannounced.

Of course, stocks can disappoint investors as well. If Acme Gravel Corp. seems to be barely treading water or if its profits are falling, investors will often abandon its shares. Its stock price will fall, and shareholders will suffer losses if they sell their stakes in the company. And, when stocks fall, they can do so swiftly and with little warning.

Investors in Oxford Health Plans know just how fast that kind of reversal can happen. The company had reported several years of solid results to the investing public, and between January 1, 1993, and September 30, 1997, Oxford rose 960%. No sooner had reports of earnings problems hit the newsstand in 1997, than Oxford shares took a dive, falling 62% in one day alone. By the end of 1998, the company stock had shed almost 80% of its value. That’s proof enough that stocks are riskier

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