Economics - Investing

The definition of investing is, "To commit (money or capital) in order to gain a financial return." There are two traditional types of investments. Fixed income investments like government bonds don't give ownership rights but they do pay a fixed rate of return. Equity investing in businesses, stocks or real estate pays returns that depend on the level of success or failure of the business. People can also put their money in a bank account. The bank pays an interest rate and the money is safe and secure and grows slowly over many years. The reason people invest in the stock market is the opportunity to make significant returns in a relatively short period of time. There is also a significant risk in the stock market as there is always the chance of losing money.

The stock market changes all the time. It will either be up or down, a little or a lot. "The stock market is looked at as a thermometer of business, politics and other environmental conditions. However it is also sometimes viewed as a crystal ball because it is so important to understand what is going to happen that will affect the future stock price." It takes research to make a good decision about what stocks to buy and it is important to know what companies will have the best chance of being successful. The stock market has changed drastically in recent years due mostly to the introduction of new technology. Technology stocks are often referred to as, "the new economy". "Old Economy is a phrase used to describe the world we knew when the Dow and blue chip companies were the most important influences in the stock market. New Economy is a phrase used to describe the "dot com" world of instant millionaires and multibillion-dollar companies barely 12 months old." New economy companies are faced with many problems in trying to attract investors and customers. Because they are totally new they have to be judged differently than old economy companies. Due to the millions of web sites in existence they need to find ways to differentiate themselves from their competitors. "Old Economy companies often had 5 to 10 years to prove themselves as industry leaders. New Economy companies must do this in months. With millions and millions of competing web sites it must distinguish itself from the competition for surfer's attention."

Stock Market

The Stock market is a forum where people who wish to invest money into corporations can do so. Markets such as the Toronto Stock Exchange (TSE), The New York Stock Exchange, the Dow Jones and NASDAQ, which is considered to be the home of high tech stocks, are a few of the platforms where people can buy and sell their share of a company. The way one goes about trading shares is by hiring a Stock Broker who owns a "seat" on the exchange. When wanting to buy or sell shares you must tell your broker to do so and he will be able to make the trade for you.

Investing in traditional companies of the "Old Economy" is made easier by many tools that are available to help someone learn more about the companies. There are business magazines such as The Wall Street Journal, Fortune and Forbes that give excellent information about companies to possibly invest in. There are also services that recommend which companies to invest in such as Standard and Poor's (S&P). Also there are some other tools that help make a good decision such as looking at a company's financial information on balance sheets. By looking at a balance sheet an investor can usually tell if the company can pay it's bills and other important information. Through looking at the company's income statement investors can tell how much money the company is earning.

People who invest also might want to understand the industry that the company is in before investing. For example, people who invested in horse and buggy whips just before the automobile went into production should have thought about this. Other things that need to be looked at are how many people are needed to make the company run and how much competition is there, how good is their management and how do they spend their money.

"Conventional methods of evaluating businesses are left in the horse and buggy age when assessing space-age industries." Traditional ways of making investing decisions such as looking at earnings and balance sheets are important but don't allow much insight to help make a decision about a new technology company. Many of the most interesting technology investment possibilities are still in their early stages of development and haven't yet established themselves.

To own a share in a company essentially means to own a portion of that corporation. Shareholders benefit if the company is successful and they may lose their investment if the company fails. Some stock will pay investors in the form of dividends, which is a share of profits earned by the company. The price of the stock is negotiable and is generally determined by how much an investor is willing to pay to buy the share. If a company files for bankruptcy the investor can only be responsible for their investment, which they will lose, as opposed to a sole proprietorship filing for bankruptcy, in which the owners personal assets can be seized.

Stock Market Cycles

Since its beginnings the stock market has worked in cycles. When people heavily invest in a particular item or company, the price of stocks skyrocket, as more people are willing to buy than sell the stock. This is called a "bull" market and is created when there is a relatively low unemployment and people are able to invest their money. The opposite is called a "bear" market and this is when the price of stock is low and there are more people selling their stock for reasons such as unemployment, over-inflated stock prices or inflation.

The typical cycle is:

1. Stocks become a hot item. This could happen because the stock is an interesting new line of business, which has the opportunity to make high profits.

2. Market bids up the price, there are more people buying stock than selling

3. Market overprices the stock.

4. Stockholders become worried and begin selling

5. The value of stock drops

6. Low prices make the stock attractive to investors again

7. There is interest in the stock again because it is priced correctly.

An