Sunday 16th January, 2005

 

Stocks are risky business

 
 
 
 
 
 
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Money Matters
with Raziah Ahmed

Mark Twain is reported to have said: “October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Stock investments are always high risk, with a concomitant promise of high return. Even higher up on the risk-return gradient, is the “futures market.”

Many persons unknowingly participate in this market, when they purchase foreign currency, hoping to gain, should the exchange rate rise in their favour.

Foreign currency forms part of the “financials market,” the other aspect of the futures market is “commodities.” Commodities are agricultural products: corn, soybean, cotton, cattle, lamb, etc, and natural resources such as metals, oil, gas, and lumber.

Average individuals do not participate in the commodities market, but its usefulness can be well appreciated for manufactures, food suppliers, and heavy industry. The futures market is a “derivative” market, meaning that the value is derived from a particular underlying asset.

“Options” are also derivatives. An option is a right to buy or sell 100 shares of stock at a specified price, within a specific time period. They represent a claim to stock, and not ownership of the stock. Many options are never exercised, but their advantage is one of leverage.

There are other expressions in the jargon as well, eg what are the Dow Jones, the Standard and Poor’s and the Nikkei 225? These are really measures of performance of the stock market, and serve as a guide to investors. They are an average, or else an index of performance, which measure the current price behaviour of a sample of stocks, with respect to a time period.

The Dow Jones is an arithmetic average, but almost all other market measures are based on an index. The Dow Jones is the oldest continuous measure of the stock market, and is based on prices for 30 stocks in the traditional industry line up for US companies.

Standard and Poor’s (the S&P 500) is a composite index of mainly New York Stock Exchange stocks that represent the average price of the 500 stocks in the index. The Nikkei 225 is a similar measure on the Japan stock market.

Nasdaq produces 11 indices ranging from transportation to utilities, based on the 100 largest market-capitalised firms in the respective categories, often referred to as the tech-company index. The most dominant stock in Nasdaq is currently Microsoft, which accounts for about 10 per cent of the index.

A non-American world index is the EAFE: the Europe, Australia and the East Index, which represents a bench mark for some 1000 stock in some 20 countries.

What goes on in the world markets, and in particular the US markets, directly influences what goes on in our local market. In fact the goals and aspirations of people remain on parallel course.

Listen to the dialogue of Mark Twain’s characters:

“Well, are you rich?”

“No, but I ben rich wunst, and gwyne to be rich

agin. Wunst I had foteen dollars, but I tuck to

specalat’n’, en got busted out.”

“What did you speculate in, Jim?”

“Well, fust I tackled stock.”

“What kind of stock?”

“Why, live stock—cattle, you know. I put ten

dollars in a cow. But I ain’ gwyne to resk no mo’

money in stock. De cow up ‘n’ died on my han’s.”

“So you lost the ten dollars.”

“No, I didn’t lose it all. I on’y los’ ‘bout nine of

it. I sole de hide en taller for a dollar en ten cents.”

From: Adventures of Huckleberry Finn

n Raziah Ahmed is a registered financial consultant

 

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