Crash and learn

Online investing can spell disaster

The Dow Jones Industrial Average took one of the biggest plunges of the year last Friday, taking back 266.90 points to close at 10019. For the week, the index had its biggest one week loss in history, losing close to 6 percent. Investors were taken aback by the release of higher than expected U.S. producer prices, raising the fear of inflation and the possibility of a third interest rate hike of the year. Many student investors on campus felt the effect of the market downturn. So this raises the question: Should you be investing in the stock market? The tempting answer is, "yes." The stock market's recent bullish tendencies are enticing. But if you're a student on a limited budget, you should consider the impact a crash would have on your finances.

With the boom of online trading services and the availability of free information over the Internet, investing in the stock market has become a national pastime. The media has helped fuel the nation's obsession. This past summer, the headlines that graced Newsweek were "Everyone's Getting Rich But Me." The media constantly reports about individuals who retire at age 30 with millions of dollars in their pocket because of the stock market. This has led many students on campus to put their earnings, savings and even their tuition money in the extremely volatile stock market in the hopes of making easy money.

But students need to be especially careful when investing in a bouncy stock market. Students usually do not have the time - or the risk equity - to be aggressive traders. Many students who do not have the available funds often buy stocks on margin, which is borrowing money from the brokerage firm. But when the stock market takes a dramatic dip, as it did last week, the brokerage firm issues a margin call, which demands the investor to pay back the money or risk liquidation. Some students start investing in the stock market with the notion that the stock market can buy them a new car or pay their rent for the coming month. Any finance major will tell you that if you are trying to get the stock market to pay your way through life, you are better off putting your money under your bed. More often then not, people with this thinking lose money.

This raises the question about the wisdom in investing tuition money in the market. The first rule in investing is to not use money that cannot be lost. This means that if you were to lose all your money, it would not affect your daily living. For students who invest their tuition money, they are in a very threatening position. Also, the risk is tremendous for a student who owns very few stocks. In a market that is extremely volatile, money can be made or lost in the blink of an eye. Besides the risk of losing money, another cost associated with the stock market is time. Students who invest in the market often find themselves obsessed with what's happening on Wall Street. Whether it's checking stock quotes every five minutes or gluing their eyes on CNBC, this can become unhealthy.

The stock market is much more risky than what is portrayed in advertising and the media. But this does not mean you should not give the stock market a thought. It is a great place to make long-term investments, especially since the returns can be much more than the 2 percent in a savings account. Students who invest need careful planning and wisdom. This means using money that is expendable, building a diversified portfolio and actually researching stocks instead of just listening to rumors. Another aspect that students need to look at is the time frame in which they are working. For those who are using the stock market as a means of saving, it is often wise just to hold on to the stocks for a couple of years. But for those who are looking to make money fast, they should also be willing to lose money fast.

10-20-99