How To Avoid Speculation In Shares And The Forex

Summary: In the vocabulary of investment, "speculation" is a nasty word. It suggests gambling, insecurity, long shots, luck, and similar improprieties. For old campaigners it stirs up memories of the 1929 unpleasantness, as damp weather tweaks the rheumatic joint. And, worst of all, it seems synonymous with money lost. For every speculator who pulls a coup, we hear, there are 99 who live to rue their recklessness, to bemoan the hard-earned dollars foolishly and irretrievably cast d...

In the vocabulary of investment, "speculation" is a nasty word. It suggests gambling, insecurity, long shots, luck, and similar improprieties. For old campaigners it stirs up memories of the 1929 unpleasantness, as damp weather tweaks the rheumatic joint. And, worst of all, it seems synonymous with money lost. For every speculator who pulls a coup, we hear, there are 99 who live to rue their recklessness, to bemoan the hard-earned dollars foolishly and irretrievably cast down the drain. The New York Stock Exchange labors long and hard to encourage a sober, sensible attitude in investors. Conscientious brokers steer their customers away from situations bearing a speculative tinge. The literature of investment inveighs against empty-headed avarice, blind faith, and other vagrant impulses that lead the innocent into ill-starred ventures. If fear breeds caution, all well and good. For speculation can be extremely hazardous, particularly for the new investor, which means in most cases the person who can least afford it. And certainly speculation, as it involves cheap, shadowy gold-mining or uranium stocks, is little better than throwing dice or picking horses. But speculation is a term of many dimensions, and it is useful for investors to understand them, rather than simply bow to the taboo By the more conservative canons of Wall Street, for instance, investment in anything except the highest grade bonds is speculation. This is strict interpretation of the dictionary definition of the word as an undertaking in which a large risk is borne in the hope of a large profit. In this sense, almost any common stock, dependent as it is on net earnings, entails some risk, some speculation. This is fairly rigid doctrine, however. It is a premise of this article that with care and attention the investor can find satisfactory common stocks as free of risk as any other form of property in an uncertain world. It then comes down to a question of the investor's objective. The investor, by and large, is in for the long pull. The speculator, characteristically, is a short-term, quick-turnover man. He is interested in speculative situations and makes use of speculative techniques. Many of them are commonplace. All of them are legal. But they usually require more capital than the new investor can bring to a transaction and they invariably demand shrewd judgment, complete familiarity with market procedures, and considerable nicety of touch in the timing of purchases and sales. In expert hands, they are useful tools for the creation of wealth. In the hands of the novice, they are-as Samuel Goldwyn said of the H-bomb-dynamite. They should be understood-and avoided. Buying on Margin Perhaps the most familiar speculative technique is buying on margin, which is utilizing credit, in the form of a loan, to acquire more stock than your cash-in-hand will purchase. Let's say, for instance, that you have $4,500 and are interested in a stock selling at $50. Ordinarily, of course, the most you could buy would be 90 shares. Through margin buying, however, you could borrow an additional $500 from your broker and get 100 shares. Is this good? Well, it's not bad. The 10 extra shares give you an increased equity, 10 more shares on which to realize a market gain. You will also get perhaps $20 or $30 in additional yearly dividends. You have saved $20.50 in fees and commissions, since the cost of a round lot is only $44, while a 90-share odd lot is $64.50-$42 for the broker and $22.50 (