Sept. 28---The stock market continues to drop as investors are
selling out. There has been considerable discussion about whether or
not people should be selling their stock at this time. The question
heard most often goes something like this: "Is it un-American
to be selling out following the terrorist attack?"
"Ours is a free
society, and we believe in a free-market system," says Robert
White, an Extension financial specialist for family programs.
"The answer is not really about patriotism. Perhaps the
question should be phrased another way. Maybe it would get more to
the point if we asked, 'Whatís it going to hurt if I sell
Personally, you may gain
by selling. Maybe your stock was going to keep losing value until
the company went bust. Perhaps its value could be doubled a month
from now. You might decide to hold your cash instead of reinvesting
for fear that everything is a bad risk. A few years later, you may
find that inflation has reduced the purchasing value of your cash
while the stocks are soaring high again. Anything could happen. Thatís
why you want to make investment decisions based on financial
planning for long- term goals, not fear in the moment.
Letís try, instead, to
answer the question, "Whatís it going to hurt?" in a
less personal way, says White.
Letís begin by
understanding what stock actually is. Stock typically refers to an
ownership share in a corporation. That is to say simply, you own a
piece of paper that says you own a part of the corporation that
issued the stock. And why would a corporation issue stock in the
first place? Corporations need money to conduct the business of the
corporation, and by buying stock, you are in effect loaning your
Why donít these
corporations get a loan from the bank? For the same reason you might
invest rather than put all your money in the bank. There is the
matter of risk.
Where there is risk or
uncertainty, lenders demand a higher rate of interest. That makes
borrowing more expensive for the corporation. Investors recognize
that risk may offer a return that is higher than the banks may offer
on savings. So a corporation issues stock that may pay an investor a
higher rate of earnings than safer bank deposits but costs the
corporation less than a traditional bank loan.
There are many
investment strategies and many ways to invest. Letís consider the
two most basic methods. There are investors and there are
speculators. Investors hope to improve their financial position over
the long run by buying stock in companies that will grow in value.
Speculators hope to improve their financial positions in the short
run by buying and selling stock in corporations as stock values
The stock market works
because investors and speculators are constantly trying to improve
their financial positions. Some are selling stock because they are
convinced the value is going down. Others are buying because they
are sure the value will go up. Some hope to finance their next
vacation by picking wisely, while others plan to enjoy their
retirement many years from now based on corporate growth.
So whatís it going to
hurt to sell? Corporations use investment capital to fund long-term
growth. That growth is based on research and development and
production- capacity expansion. Investors understand that stock
values have ups and downs, but hold stock so that the plans for
growth proceed. When investors become speculators, they begin to
focus on stock that is paying the highest rate of return at the
moment. This means that the supply of investment capital is
uncertain or at risk.
In order to keep stock
attractive to investors, corporations may cut back on long- run
expenses that reduce short-term profits. That means research and
development and expansion are at risk. Current inventories may need
to be reduced as well as the workforce that produces those
inventories. In the short term, this may result in stock values that
appeal to speculators. Investors however, may decide that these
corporations arenít planning to grow in the long term. Then the
selling may start all over again.
Eventually, the panic
and profit taking of the short run gives way to goals and planning
for the future. Thatís life in the stock market, says White.
"So whatís it going to hurt? The answer may be nothing or
everything, sooner or later."
If you want to learn
more about investing and achieving financial goals, check out the
"Investing For Your Future" home study course on the
Rutgers Extension Web site at www.investing.rutgers.edu/.
White, Extension Financial Specialist for Family Programs,
Alabama Cooperative Extension System, (334) 844-2235.