His online broker charges him a small commission for

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Unformatted text preview: to “buy the market” instead of buying a few individual stocks. He checks on the current price of Spyders. He sees the current price is $120.16 per share. He decides to buy 100 shares, for a total price of $12,016. His online broker charges him a small commission for this stock purchase. EXAMPLE: QUESTION: Is it a good idea to buy stock? ANSWER: A lot depends on such factors as your age (are you at the beginning of your work career or near the end), your income, and how much you can afford to invest in the stock market. There is no guarantee that stock that you buy will go up in price. However, generally it is the case that stock prices increase over the long run. 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 439 Picking Stocks: Darts or Analysts? ?????????????????? L et’s say that you just inherited some money and decide that you would like to buy some stock. What’s your investment strategy? • • • You could pick and buy certain individual stocks yourself. You could buy shares in a mutual fund. You would invest your money in a fund created by the so-called Wall Street experts. A third option would be to buy a stock index fund, such as the 30 stocks that make up the DJIA, or the 500 stocks that make up the Standard & Poor’s 500. Most people think stock mutual funds do better than the stock index funds because the experts pick the stocks that make up the funds. These experts make it their business to study stocks day and night. Right? Enter Burton Malkiel, a professor of financial economics at Princeton University. He has shown that a person who invested $10,000 in 1969 in the Standard & Poor’s 500 stock index fund (which is not managed by the experts) would have seen its value increase to $310,000 by mid1984. But the person who invested $10,000 in 1969 in the average actively managed fund would have seen its value increase to $170,000, or $140,000 less than the stock index fund. Many rigorous studies confirm Malkiel’s results. For now, though, consider...
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