Street Wise Questions and Answers

Ever been confused by a particular investing term or idea? Welcome to a place where you can get some answers. Below are some questions young investors have asked me about the stock market. If you have a question, send it in. If I can’t answer it, I promise I’ll hunt down an expert who can. Don’t be shy. Remember: the only dumb questions are the ones you’re too timid to ask. Click here to send in a question.

How can I get started investing?

Max, age 16, New York City There are a couple of ways to begin. If you’re timid about actually investing some of o your hard-earned cash immediately, my recommendation would be to construct a paper’ or virtual portfolio on one of the many web sites that allows you to do so. (Any web site that has a "My Portfolio" type of feature usually allows you to enter the names of stocks and the number of shares you own’ of those stocks. Then, anytime you want to check on the portfolio, the site will update the value of your holdings with current stock prices.) Nobody says you actually have to own the stocks to follow them for a few months this way! This can give you a chance to try out your stock picking. When you’re ready to plunk down some real money, you also have some options. I think one good choice for beginning investors with a limited amount of money is one of the web sites, like Sharebuilder.com or Buyandhold.com that allow you to buy fractional shares. This way, you can invest, say, $20 a month and still buy some of the higher priced stocks you may be interested in but couldn’t afford to buy whole shares of. Good luck and keep in touch!

I read about a teenager who got in trouble with the SEC. What happened?

There are a couple of lessons to learn from the case of Jonathan Lebed, a 15 year old investor who had the Securities and Exchange Commission (SEC) bring civil fraud charges against him last year. The story: Lebed, according to SEC documents, was 14 when he bought large blocks of very small and thinly traded stocks. (Thinly traded means there isn’t much buying and selling of these going on. A stock that is thinly traded is also more easily manipulated for reasons that will become clear in a moment!) Within a few hours of buying the stocks, he would post many false or misleading e-mail messages, under various names, on Internet stock message boards, primarily Yahoo! Finance boards. His messages caused the stock prices to increase, and he sold his stock at a profit. This is known as a "pump and dump" scheme, and as Lebed found out when the SEC came calling, it is highly illegal. He and his parents settled with the SEC in September 2000, and had to pay back $285,000 in profits and fees. The first lesson is, of course, not to do what Lebed did. But the other lesson is how you, as an investor, can’t trust Internet stock message or bulletin boards. Remember that if you read good news or optimistic predictions about a stock, the person posting the message may not know what he or she is talking about, Maybe they’re even trying to force a stock price up or down to make a few bucks for themselves. While these bulletin boards are fun to read, they should be a starting point for you to do some investigating!

"Why do some stock prices go way up and down and others not move much at all? "

Jamie
Chapel Hill, North Carolina

That’s a great question! The term used to describe a stock that moves up and down a lot is "volatile." A stock that is volatile is a little like a roller coaster -- taking investors up and down on a ride that is both thrilling and scary. (A stock that isn’t volatile is more like a calm boat ride across still waters.) Volatility doesn’t necessarily tell you whether or not a stock will make more money for you, but more volatile stocks are considered riskier; at any given time when you may want to sell, the price may be on a downswing. There are any number of factors that contribute to volatility: generally companies that are more unpredictable are more volatile. That often includes younger, smaller and faster growing companies, which tend to be more volatile because their financial results go up and down more. Lots of professional investors spend their days trying to figure out volatility, and trying to predict it.

"What can’t I buy stock in the company that makes Beanie Babies?"

Lauren
Doylestown, Pa.

That’s because the company that makes Beanie Babies is privately owned and doesn’t sell stock to the public. The owners of private companies are often family members of the founders, company executives and employees. Not all big companies are publicly held, but don’t worry. There are plenty of other toy companies that do sell stock.

"What’s the biggest company in America?"

Brad
Irvine, California

It depends on how you measure it. If you look at what company has the largest sales, it would be General Motors, which ranked number one in Fortune Magazine’s most recent Fortune 500 listing. Another way to measure size would be by market capitalization -- taking the number of shares of stock outstanding and multiplying by the stock price. Using that method, Microsoft would currently be the leader.

"When I watch the news a lot of times they show someone ringing a bell at the New York Stock Exchange. Who are those people?"

Rebecca
Chicago, Illinois

What you’ve probably seen on TV are people ringing a bell to signal the beginning (at 9:30 a.m.) or end (at 4 p.m.) of the trading day at the New York Stock Exchange. The people who get to do it are often business executives of companies that have just gone public, or are making a big announcement. Figures as diverse as Jack Welch, chairman of General Electric, Olympic skating champion Kristi Yamaguchi, lifestyle guru Martha Stewart and the New York Yankees baseball team have all rung the opening bell at the NYSE.