Returning to University life equipped with summer paychecks can feel like a once-in-a-lifetime free for all. When the pressures to spend are everywhere, students rarely contemplate the incentives to save or invest.
But before you succumb to the temptation of Internet shopping at ethernet speeds or footing the bill for another dinner on the Corner, consider investing that hard-earned income in the stock market. With the growing number of people embarking into stocks and the plethora of resources available to assist them, a leap into the world of investing could be just as modern as that new cell phone or leather skirt you've been vying for.
According to Economics professor Kenneth Elzinga, any time is a particularly good time to invest in the stock market since stocks generally outperform all other income-generating assets over the long run.
"You should invest all of your surplus cash in something, either a money market fund or short-term fixed income securities," Finance professor Richard DeMong said. "However, you should only invest in the stock market if you may not need the funds for 10 years or so."
If planning that far ahead still seems unreasonable, consider an early jump in investing as part of a lifelong skill to hone. With brokerage firms, banks and investing advisors on the Internet, all the means to educate yourself are literally at your fingertips.
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"The first rule of investing is to know your own objectives and risk tolerances. The second rule, which is just as important as the first rule, is to know what you're investing in. If you don't understand the investment proposition, don't invest in it until you do," DeMong said.
One place to start researching a company and its stocks is http://finance.yahoo.com, a favorite resource of McIntire Investment Institute President Andy Schoonover.
Yahoo Finance is a free, user-friendly site that provides financial reports, company profiles and valuable industry information. TheStreet.com and Zacks.com are similar sites that offer free, solid investing advice from expert analysts. Annual and quarterly financial reports are also typically available on a company's own Web site.
A well-educated stock pick should clearly delineate investing from speculating.
"You have to be completely knowledgeable of your purchase of a company," said Sherjeel Khan, Bank of America financial analyst and 2000 Commerce graduate.
A common investor's nightmare is losing money on a stock for reasons that easily could have been foreseen with more thorough research.
"Some of my friends and I were getting excited about what was happening with the dot-com companies so we took a huge risk and made a lot of money investing in Yahoo, Priceline and Egroup," recalls one 2000 Commerce graduate who asked not to be identified.
"It was a fluke. These aren't solid companies, nothing like Sun or Cisco or General Electric. We hadn't researched enough, we were just riding on the euphoria of the new technology stocks, banking on the high expectations."
In short, he was uncommonly lucky. Now employed as a financial analyst at a New York investment bank, he advises substituting thorough industry research for hype and hearsay.
"Looking at [price to earnings] ratios and indications of profit are not enough," he said. "An investor needs to have a complete understanding of how a company works."
Studying a company's financial statements, management, customers and competitors is a crucial start.
"You need to understand the growth potential of the company's earnings and the risks that are associated with it," DeMong said.
If acquiring the expertise to understand financial statements and business models seems too daunting a task, purchasing stocks with a traditional broker offers more guidance than popular online brokers like Etrade and Ameritrade.
Although the rewards for investing in the country's strong economy are apparent, the risks are still pervasive as ever, as witnessed by the devaluation of the dot-com sector.
Reducing the risk of an investment is achieved by spreading money over different industries, ensuring that a fallout in one sector won't devastate your entire investment. Achieving a diversified portfolio is challenging for a new investor because they tend to buy only a few stocks at a time.
Until new investors feel very comfortable with choosing individual stocks, investing in a well-run mutual fund is the best way to minimize risk, DeMong suggests.
Schoonover recommends that new investors allocate at least 75 percent of their investment budget in mutual or index funds with the remaining 25 percent reserved for experimenting on your own in the stock market.
Choosing several mutual funds is an additional safeguard since they tend to be very specific. Aggressive growth mutual funds are made up of more risky, high-growth stocks, while the growth and income funds focus on growing companies that expect steady returns. A combination of United States growth and income mutual funds along with some international index funds minimizes investment risk.
Regardless of whether the investment decision leans toward stocks or funds, an investor never can diminish completely the element of risk.
The bottom line, according to Schoonover, is, "if you can't afford to lose it, don't mess with it"
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