Insider Hint: Conservative Investments or High-Risk Adventures?

Provided By www.stocktradingonline.org

A man who buys a large share of stock in a company suddenly finds himself in a new and exicting position. This is ownership, in many ways an extension of the partnership that the corporate form originally superseded. The stock\holder has a voice, frequently a loud one, in the affairs of his company. When it does well, he basks in sunlight. When it does poorly, he suffers. No one has any obligation to pay him anything, although directors are mindful of him and happy to declare dividends whenever the prosperity of the corporation permits and maintenance of its health has been assured.

And when good times are upon it, ah, then come the dividend increases and the extras and the stock dividends. The shareholder is the prime beneficiary of stock splits, rights, and spin-offs, or distribution of assets. He can make a fortune in capital gains in a strong bull market.

The advantages of common stock are several. The common stockholder in this generation generally gets a higher return on his money than any other securities investor. Even a moderate increase in a dividend rate can shoot the yield on the original purchase price of the stock to a most pleasing 10 or 12 percent. Even at depressed prices and high interest or dividend rates, few bonds or preferreds could touch this. The common stockholder also has a stronger chance for long-term capital gains, with their attendant tax advantages.

Bonds and preferreds both may appreciate handsomely, but it is a statistical fact that neither moves as much, as far, or as fast as stock. And, finally, although stock certainly can move down as far and fast as up, the stockholder is not totally stripped of safety. More than a few stocks these days are as gilt-edged and rock-solid as any bond ever was.

Stocks are also extremely marketable. More people own stock than own bonds or preferreds, and more people trade in them. The very simple reasons for this are that there are more stocks, a greater diversity of stock, and that, by and large, they cost less.

Stocks can be a hedge against inflation, though this argument can be overplayed and frequently is. Theoretically, if dollars are cheap, easy, and plentiful, more of them are reaped through the higher prices charged by corporations for their products. Hence, more of them are passed on to stockholders as dividends. Inflation, however, is not a thoroughly healthy economic condition. Higher prices are accompanied by higher costs, squeezes on profit margins, the failure of marginal companies whose inefficiencies passed unnoticed in less hectic times, resistance from buyers, and all manner of problems that do not automatically pour profits in to company headquarters.

For those who make it — and some make it big, even during inflation — dividend dollars may be increased. Whether they increase enough to stay ahead of the inflation is still another question, but any increase at all is a help. Those who do not do well can be of no assistance to their dollar-hungry stockholders.

On balance, the most that can be said is that certain, not necessarily predictable, stocks can be a hedge against inflation, but that the fixed-income provisions of bonds and preferreds make it impossible for them to be such a hedge. For the new investor with moderate sums to invest, common stocks are generally the best securities investment he can make after he has acquired a backlog of E Bonds.

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