Investing Is for the Little Guy

This FAQ has been prepared as a follow up on the article “Investing for the Little Guy.” This article examined the firm’s approach to investments by the small investor. Since the article was run many questions were submitted and this FAQ is intended to answer many of these questions. An investment in the stock market is an investment in the economy as invested capital allows companies to put these funds to use in conducting business. As companies are successful in using these funds to conduct business, rewards are received by the investor in the forms of dividends and increase in value of the purchased securities. Let us examine a couple ways to reduce risk. First look at sales volatility. Does the firm adapt to changes in order to stabilize their sales? Next is fixed cost. The larger the amount of fixed cost the greater the risk. Another way to reduce risk is by using diversification. Don't invest everything you have on one thing. Reduction in the fluctuations of returns is known as diversification effect.

The risk return relationship is what any investor must calculate. This is the measurement of the risk related to the rate of return. The higher the risk, the higher the return will be. The pay off is one of the considerations for investing in a risky stock. If you invest $1000 and if all goes well then your rate of return after one year may be $5000 then why not take the time to measure and lesson the degree of risk for the higher return? Again there is a degree