Essentials of Borrowing
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Is It Safe To Invest In Shares Or The Forex?
You feel yourself financially able and personally qualified to invest. You can meet the conditions of reasonable stability, reasonable flexibility, and reasonable caution. But nagging doubt remains. Wouldn't you really be better off with your extra cash in a savings account? Or a piece of real estate? In short, is it really safe to invest? Well, how much safety do you require? Since there are no absolutely sure things anywhere, safety must be looked at as a matter of degree. There are no guarantees of success in stock ownership, no guarantees against loss. Even the thoughtful, conscientious investor can be taken to the cleaners.
It should be remembered, however, that investment in stocks is a way of sharing in the profit potential of American industry. Is the American economy safe? It seems to be. Since 1900 it has been rising in productivity at an average rate of 4 per cent per year. Our Gross National Product is now nearly $480 billion. By 1965, according to quite conservative estimates, it is expected to rise 30 per cent to some $535 billion.
A few hard-headed stargazers among our economists feel it may go as high as $600 billion and perhaps to $700 billion by 1970. (In the early Thirties it was only $56 billion less than the 1959 Federal budget.) Should these peaks in fact be reached, or even approached, the likely result would be an unexampled level of national prosperity. For corporations, prosperity is reflected in earnings. For stockholders, it is reflected in a larger share of these earnings through increased dividends, or in capital gains a rise in the value of the stock hi the open market owing to the pressure of investors who anticipate further earnings by the corporation and wish to get aboard. This generally upward trend is, in fact, the course the market has taken in this century. [In only 29 years—from 1930 to the end of 1959—the value of stocks listed on the New York Stock Exchange has zoomed from $49 billion to more than $307 billion.] Of course, none of this means that the economy is impervious to setbacks or depressions. We have had them before and, chances are, we will have them again. An economy is a subtle and, to a considerable extent, still unknown combination of forces which produces prosperity only when a certain balance is maintained among them.
Until all the factors establishing the balance are understood and controlled, dislocations can and will occur. It also follows that depression is pervasive. Stock values are a sensitive—and sometimes nervous—barometer of economic weather, but they are not the only gauge affected in times of stress. The bottom has been known to fall out of the real-estate market. And insurance companies and savings institutions, both of which invest heavily in real estate, mortgages, and securities to obtain the earnings they pay out in interest, cannot escape the consequences of a national depression either. In their pleasure at seeing banks raise their interest rate on savings to 3¼ per cent, as many have done in the past few years, people are inclined to forget that there was a time when banks paid 4 per cent. But somewhere along the line, in response to economic factors and the available return on investment, there was a decline to a 2 per cent rate from which we are only now emerging. What price safety? If you believe in the essential safety of the American economy, if you have faith in the ability of American business to flourish in the future as it has in the past, investment as a technique for making your extra money make money is safe. Is the Market Safe? This question, still asked and still wondered about, assumes that there is something inherently perilous about a stock exchange. There isn't.
An exchange is simply an agency, a market where buyers and sellers can meet—through their brokers—to complete a transaction. An exchange—the market—is a complex and turbulent place, but it exists on the traffic of investors. When the pace is hot, the exchange boils. But when action is light, it languishes. An exchange does not set prices. It does not issue stock. It does not, for itself, buy or sell a single share. It is a service, an accommodation, in a sense a kind of clearing house. It is an operating enterprise, an institution, but it does not dictate the action that takes place within its precincts, any more than Comiskey Park determines whether the White Sox win or lose. Its operations will be described in greater detail further along, but to make the point about the limited though essential role it plays, this much can be said here.
Since it does not issue stock, it can handle only those shares already in existence and listed. Of the outstanding shares in any particular company, only a small percentage is changing hands at any one time. The rest—the majority of it—is held by individuals and institutions who happen not to want to sell. If, therefore, a man in Des Moines wishes to buy 100 shares, he must find a seller. This he accomplishes through his broker and, eventually, through the facilities of the exchange. For on the floor, at the trading post, the buyer's broker will find a broker with an order to sell. If they can get together on price and in the refined and fluid mechanics of exchange operation they usually can a market is made. These transactions are conducted under regulations rigorously enforced by the exchange's board of governors and executive staff—and ultimately supervised by the Securities and Exchange Commission in Washington. But what about 1929? For anyone who lived through the great market crash, or has heard of it, this question is still likely to lurk in the subconscious.
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