There are lessons to be learned during the current bear market

  • Saturday, September 22, 2001 9:00pm
  • Business

Associated Press

NEW YORK — With the shaky stock market and slumping economy providing few clues on how to make wise investments, investors might feel like they’re on their own.

So, like students headed back to school, investors might consider brushing up.

"At this point they should be thinking of learning a bit more. It has been too easy. They should be thinking of getting back to the basics, the nitty gritty," said Janice Stonestreet, chairwoman of the Kansas City Chapter of the National Association of Investors Corp., which represents the country’s investment clubs.

But to Stonestreet’s dismay, attendance has been dwindling at her chapter’s weekend investment programs, which cover fundamentals of mutual fund and stocks.

"They should be coming out to find out how to do better and at least commiserate with others," said Stonestreet, adding that class attendance has generally dropped from about 100 during the bull market to 60 as the economy cooled.

Before heading to a class, however, investors might feel more comfortable knowing the lingo, said Peter DiTeresa, senior fund analyst at Morningstar, an investment research firm in Chicago. He suggested people take Morningstar’s online courses, which involve spending about 10 minutes reading text on such topics as how companies become public or how to read financial reports.

DiTeresa also recommended online investment glossaries, which explain basic terms, such as:

  • Load. Some mutual funds shares are sold at a price, which is called a load, ranging from about 3 percent to 8 percent of the purchase.

  • Capitalization. Like stocks, mutual funds are often categorized by size, using the terms large-cap, medium-cap and small-cap. Large-cap funds focus on large-capitalization companies, which typically have market capitalizations of $1 billion or more. By comparison, small-caps are those with a market cap of less than $200 million.

  • Growth and income. The terms "growth" and "income" refer to the strategies of funds and fund managers. The goal of growth funds is capital appreciation, and so these funds invest in companies that reinvest earnings to expand their business. The objective of an income fund to provide investors with a stream of income by investing in securities that pay interest or dividends.

    Income funds are considered more conservative investments than growth funds. However, these terms can be interpreted differently by different fund managers, increasing the need for investors to read the fund’s prospectus.

  • Balanced fund. A balanced fund invests in a combination of bonds and stock to offer investors diversification.

  • Global and international funds. Analysts say it’s a good idea for investors to reduce their commitment to U.S. stocks by investing abroad. But they should know the difference between global and international funds. Federal law allows global fund managers to invest up to 25 percent of their portfolio in American stocks. International funds, however, are not allowed to invest domestically.

  • Net asset value. Net asset value tells an investor how expensive a fund’s shares are relative to its assets, similar to how the price-to-earnings ratio works for stocks. NAVs, which are printed in most newspapers business sections, are computed by dividing the fund’s net asset by the number of its outstanding shares.

  • Index fund. An index fund’s holdings mirror a stock exchange index, such as the Standard &Poor’s 500 or the Russell 2000. The idea is that a portfolio can simulate an index without investors having to buy shares of hundreds of individuals stocks.

  • Sector fund. Sector funds’ portfolios concentrate on companies in specific sectors, such as health care, technology and real estate.

  • Exchange traded funds. ETFs are a mix between index mutual funds and stocks. Like index funds, ETFs are "baskets" of an array of stocks that mirror stock indexes. But ETFs are traded on a stock exchange as individual stocks are, which allows share prices to fluctuate throughout the day and appeals to shorter-term investors who want more flexibility. Thus, an ETF’s price changes throughout the day as investors buy and sell shares, unlike funds which have their net asset value calculated at the end of each trading day.

    Copyright ©2001 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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