of authorizedshares. Thus, the lower the par value, the lower the tax. As this valuation, and hencetax, can be substantial, you often see par values as fractions of a cent.Most investors have their brokerage firms hold the certificates in “streetname,” meaning that you still own the stock, but it is held forsafekeeping, which is a nice convenience. But the choice is yoursto make; you may request to physically retain the certificate if you wish.
TYPES OF STOCKSThe question every investor faces before putting one cent in the market is: Whatshould I invest in? Although there are no official lists that divide stocks into separatecategories, stocks are unofficially classified by size, as well as by the nature of theirbusiness, or sector. These unofficial classifications help investors to get a sense of astock’s parameters and the nature of the business. The advantages and disadvantagesof each kind of stock depend on your investment goals and risk tolerance.Sector: An unofficial group composed of companies involved in the same industry, such as technology, energy, or biotechnology.
The size of a stock is primarily dependent on its market capitalization. Capitalization is easily calculated by multiplying the number of outstanding shares by thecurrent market price per share. For example, if Microsoft (MSFT) currently has approximately 5.3 billion shares outstanding, and is trading at approximately $70 pershare, the software giant has a total market capitalization of approximately $371billion (70 × 5.3 billion = $371 billion).Market capitalization: The value of a company calculated by multiplying thenumber of outstanding shares by the current market price per share.
Using market capitalization as a guide, stocks can be broken down into four sizecategories: large-cap, mid-cap, small-cap, and micro-cap (see Figure 3.4). Largecap stocks represent companies with a capitalization of more than $5 billion. Alsocommonly referred to as blue-chip stocks, large-caps are generally mature companies with tremendous assets all over the world. The term “blue-chip” is derivedfrom the game of poker in which blue chips have the highest value. Blue-chipstocks are regarded as safe investments because they do not run the risk of goingbelly-up. They are traded on the major exchanges and provide regular dividends toshareholders—perhaps their most appealing advantage. Unfortunately, large-capsrarely experience the fast growth that smaller stocks can create. But slower growthis offset by reliable dividends and the reduced risk of loss. Examples of large-caps
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Stock Description
Valuation Range
Large-cap stocks(blue-chip stocks)
More than $5Billion
GE, MSFT, F, PGDow Industrials ($INDU)
Mid-cap stocks
$500 millionto $5 billion
Minimed (MNMD)Power One (PWER)S&P 400 MidCap ($MID)(www.spglobal.com/ssindexmain400.html)
Small-cap stocks
$150 millionto $500million
Onyx Pharmaceuticals (ONXX)Labor Ready (LRW)Russell 2000 Index ($RUT)S&P SmallCap 600 ($SML)(www.spglobal.com/ssindexmain600.html)
Micro-cap stocks
Less than$150 million
“Penny stocks” andStocks priced under $2(www.pinksheets.com)
Figure 3.4
Examples
Market Cap Examples and Web Sites
are easily found all over your home. These companies manufactured your appliances, probably designed and built your car, and represent the newly merged, megamedia conglomerates of our time. Blue-chip coompanies are dedicated tomaximizing profits for their shareholders. The Dow Jones Industrial Average is primarily comprised of blue-chip stocks.Mid-cap stocks have a market capitalization of between $500 million and $5 billion. Mid-caps typically experience slower growth than small-caps and faster growththan large-caps. In addition, mid-cap stocks are not difficult to buy and sell since theyare actively traded, making mid-cap positions easy to enter and exit. Mid-caps oftenbestow dividends on their shareholders, but not as regularly as large-cap stocks.Small-caps have a market capitalization of between $150 million and $500 million. They offer traders the opportunity for fast growth and are usually much cheaperthan mid-caps or blue-chip stocks. Lower starting prices give them the ability to generate dramatic price gains. Unfortunately, they also have a greater capacity for failure. Small-cap stocks rarely (if ever) issue dividends because of their need for capitalto fuel further growth. They are often undervalued because institutional coverage (byanalysts) has not begun or analysts are in the initial stages of research, and thereforetheir stories haven’t been disseminated very well. Institutional investors often can’tbuy into them because the smaller companies don’t meet fiscal requirements thatgovern the investments of many money managers and pension funds. They may beovervalued because investor sentiment has exceeded even optimistic valuations, removing fear from buying (and selling) decisions, thus driving up the price. The sudden and sometimes extreme pullbacks these stocks experience are sobering events.In spite of that, small-caps are attractive investments because they offer investors thechance to get in on the ground floor of the next Dell Computer.
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There’s a web site—www.smallcapstocks.net.com—that specializes inhelping investors find undervalued and overlooked small-cap stocks.
Micro-cap stocks have a market capitalization of less than $150 million. Theycan be extremely risky investments because a significant percentage of companiesfail early in the development cycle for a variety of reasons: poor management, failure of a marketing strategy, customer rejection of goods or services offered, and soon. If you decide to venture into the realm of micro-caps, make sure you do yourhomework first. I’m not saying that you can’t or won’t make a profit (or even a fortune); just be very careful.For more information on micro-caps, check out the Stockpage(www.thestockpage.com) or the Pink Sheets (www.pinksheets.com).
Another way to classify a stock is by the nature of its objectives. These usefulcategories include income, cyclical, growth, turnaround, and green stocks. Figure3.5 shows a breakdown of their characteristics.I mention these unofficial categories to help you to focus on the kind of stockthat fits your investment parameters. If you’re in the position to invest aggressively,then growth and turnaround stocks may hold your interest. Long-term investorsmay prefer to invest in large-cap income and established growth stocks becausethey provide a safer investment approach. Regardless of which kind of stocks youchoose to focus on, it’s still absolutely imperative to know how to research them before putting your money on the line.
THE MECHANICS OF STOCK INVESTINGWhen you get right down to the heart of the issue, the mechanics of stock tradinginvolve either buying or selling shares of stock. Both techniques come with theirown sets of advantages and disadvantages depending on market circumstances.When evaluating any trading strategy it is important to assess the risk and rewardpossibilities and probabilities. This information helps a trader to decide whether atrade is worth the money invested in it.
Buying StockThe objective of buying shares of stock (or going long) is to make money in a risingor bull market. Buying stock is pretty self-explanatory. You buy stock in a companyfor a specific price. If the stock rises in price, you can sell the shares for that higherprice and pocket the difference. Buying stock, or going long the market, is easilythe most popular method for novice traders to begin with. It starts getting complicated only if you decide to buy the shares on margin.
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Type of Stock
Characteristics
Examples
Income• Solid companies that offer slowstocks—but steady growth.Conservative • Regularly pay out dividendsto their shareholders.• Do not offer dramatic returns.
Exxon Mobil (XOM)3M (MMM)Bank of America (BAC)Duke Energy (DUK)
Cyclical• Fluctuate in relation to thestocks—economy, seasons, or events.Conservative • An excellent gauge for thestrength of the economy.
PPG Industries (PPG)Weyerhaeuser (WY)Alcoa Inc. (AA)
Growthstocks—Aggressive
• Rarely pay out dividends totheir shareholders because theyprefer to reinvest their profits forfuture growth.• Two kinds of growth stocks:established-growth and emerginggrowth. Established-growth stockshave seen several years of successfulexpansion. In contrast, emerginggrowth stocks are the up-and-comersthat are currently experiencing dramaticexpansion, yet have limited previousgrowth experience. Both offer investorsthe potential to make dramatic gains orheavy losses depending on marketperformance.
Cisco (CSCO)Dell Computer (DELL)Home Depot (HD)Charles Schwab (SCH)
Turnaroundstocks—Agressive
• Stocks that have suffered severe lossesthat are due for a turnaround—investorshave to know when a stock has reachedrock bottom and just what can make itrebound.• Offer explosive growth opportunities.• No guarantees and high risk.• Warren Buffett’s favorite stock-pickingmethod.
Blockbuster (BBI)Peapod (PPOD)Dr. Koop.com (KOOP)Rite Aid Corp. (RAD)
Greenstocks—Varies
• Environmentally friendly and sociallyconscious stocks.• Spawned the concepts of consciousinvesting and corporate accountability.• If saving the rain forests is high on yourpriority list of things to do, green stocksare definitely worth checking out atwww.greenmoney.com orwww.goodmoney.com.
Enron (ENR)The Williams Co. (WMB)Ben & Jerry’s (BJICA)Adolph Coors (RKY)US West (USW)
Figure 3.5
Breakdown of Stock Categories by Objective
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Going long: To buy stock, options, or futures in order to profit from a rise in themarket price.Bull market: A rising stock market over a prolonged period of time, usuallycaused by a strong economy and subsequent increased corporate profits.
There are two ways to place a long stock position: from a cash account or amargin account. If you use a cash account you are simply buying the stock straightout by incurring a debit in your trading account for the total amount (“cash andcarry”). With a margin account, you have (but are not obligated to use) borrowingpower for purchasing securities. Your brokerage agrees to put up half the cash forthe trade, thereby increasing your leveraging power 2 to 1. Each firm will, however, charge you interest on the money lent. Although this sounds good on paper,there are additional risks associated with buying stocks on margin. Specifically, ifthe stock drops, your brokerage will more than likely require you to post additionalmoney to secure the position. If you don’t have enough money to cover the margincall, your position will be automatically closed, incurring a loss on the position.Cash account: An account in which the customer is required to pay in full for allpurchased securities.Margin account: A customer account in which a brokerage firm lends the customer part of the purchase price of a trade.Margin: A required deposit contributed by a customer as a percentage of thecurrent market value of the securities held in a margin account. This amountchanges as the investment price changes.
In either case, a long stock position is completely at the mercy of market directionto make a profit (see Figure 3.6). Going long demands an uptrend in the market for thetrade to be successful. In today’s volatile markets, many traders prefer to hedge theirpositions using a variety of alternative trading instruments (like options and/or bonds).Bottom line: If you go long without hedging your position,you are depending on market direction to make a profit.
Short Selling StockIf a market is trending down there’s a technique known as shorting the market thatcan be used to take advantage of a drop in prices. Let’s say you’re watching a stockand you anticipate a price decline. You can borrow the shares from your brokeragefirm in order to sell them at a higher price (selling them short) and at a later date buythem back at the lower price to replenish your brokerage’s supply. When you short
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Long StockEntry Strategy = Buy shares of stock.Exit Strategy = Sell shares previously purchased at a higher price, pocketing thedifference.Market Opportunity = Look for a bullish market where a rise in the price of thestock is anticipated.Maximum Risk = Limited to the price of the stock as it approaches zero.Maximum Profit = Unlimited as the price of the stock rises above the initialpurchase price.Breakeven = Price of the stock at trade initiation.
Figure 3.6
Long Stock Strategy Review
the market, you receive a credit in your trading account reflecting the proceeds ofthe sale. That’s right. As long as you have enough money to cover the margin requirements of the sale (usually 150% of the total credit received from the sale), yourbroker will lend you shares of stock to sell. Sounds inviting, but unfortunately,sooner or later you have to cover the short by giving the shares back to the brokerage—hopefully by purchasing them back at a lower price on the open market. Thissettles the account with the broker, and you get to keep the change. Therefore, yourprofit on a short position is equal to the amount the stock has moved down betweenthe time you sold short the shares to open the position and the time you boughtshares to close the position (minus the commissions).Shorting the market: The sale of shares that a seller does not currently own. Theseller borrows them (usually from a broker) and sells them with the intent to replace what he or she has sold through later repurchase in the market at a lowerprice.Cover the short: To buy shares of stock to replenish those borrowed from yourbrokerage to place a short sale.
Let’s look at a specific example of the mathematics of shorting. EMC is currently trading at 851/2 per share. If you want to go short 100 shares, you’ll receive$8,550 in your account for shorting the shares. To place the trade, most brokerageswill require you to post a margin deposit of 150% or in this case $12,825 ($8,550× 1.5). Let’s say the stock drops to 75 and you decide to close the position, or coveryour short. You then cover the short by buying the 100 shares at the lower price of$7,500. You get to keep the profit of $1,050—the difference between what you originally sold them at and what you bought the shares for times the number of shares inthe transaction [100 shares × (85.5 – 75) = $1,050].
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At first, it may be hard to grasp the concept of making money by sellingsomething you don’t own; but short selling, although risky, is actuallyone of the basic methods used by successful traders in the trading game.
Shorting borrowed stock is a more aggressive approach to trading. It is a highrisk strategy, because if the market turns bullish a trader will eventually have to buythe shares back at the higher price to cover the short. For example, as mentioned, togo short 100 shares of EMC at 851/2 per share, you’d need to post an additional$12,825 margin requirement (150% of the total credit from the sale) in your tradingaccount. However, you’d also have to have enough money in your account to meetan increased margin requirement for the position in case the market price increases.The amount of money or margin depends on your brokerage’s terms, but you canbet it’s a lot of money to have tied up in one trade if you’re just starting out. However, shorting the market is a very common technique in trading and definitely partof the bigger picture for most experienced traders (see Figure 3.7).If you are interested in shorting a stock as a means of investing, consider theseimportant points before jumping in headfirst:1. Margin requirements can be high. Brokerage firms require hefty margins because they are taking a risk. The stock you borrowed may rise (instead of fall)in value. You will then be obligated to buy it back at the higher price to coveryour short.2. If the stock were to pay a dividend, the short seller would be responsible forthe payment.3. Holding a short position in the stock for over one year does not constitute along-term capital gain.4. Capital gain tax shelters are for long stockholders, not short sellers.
Short StockEntry Strategy = Sell shares of stock you don’t own by borrowing them fromyour brokerage firm.Exit Strategy = Buy back shares at a lower price, pocket the difference, andreturn shares to the lender.Market Opportunity = Look for a bearish market where a fall in the price of thestock is anticipated.Maximum Risk = Unlimited to the upside.Maximum Profit = Limited to the full price of the stock shares as they fall to zero.Breakeven = Price of the stock at initiation.
Figure 3.7
Short Stock Strategy Review
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One of the big differences to take into account about buying and short sellingstock comes in the form of risk. Short selling stock equals unlimited risk, and buying stock equals limited risk. But exactly what is the difference? If you jump infront of a bus, you run the risk of dying. That’s unlimited risk. If you only ran therisk of breaking your arm, this would be limited risk. Which one would you prefer?Although throwing caution to the wind (whether in a short or a long position) mayseem like a courageous act of wild abandon, limited risk is a more sustainable approach to everyday trading. You have to go wherever the least risk and best possiblereward is presented in everything you do.Unlimited risk: The maximum amount of money that can be lost in a trade is infinite. For example, short selling comes with unlimited risk because there is no limitto how high the stock price can rise above the amount for which it was sold.Limited risk: The maximum amount of money that can be lost in a trade is a finite and known amount. For example, buying stock comes with limited risk because the stock can fall only to zero, which means you risk only the amount youpaid for the stock.
As you can see, short selling has its pros and cons. Although the seller receivesthe money in advance, there is the threat of unlimited risk and high margin requirements to deal with. I prefer to use short selling as a means of hedging risk by employing a combination of stocks and options to create nondirectional trades thatmake money regardless of whether the stock goes up or down! This is the only wayI would ever short the market, because I’m protected in the event the stock rises before I can replace the shares I borrowed.
CASH AND MARGIN TRADINGDetermining how much money you need in order to make your first trade can bevery tricky. The exact amount depends on a number of factors, including your market selection, the size of the transaction (number of shares), and the risk on thetrade. It also depends on whether you want to do your trade using a margin or a cashaccount. Cash trades require you to put up 100% of the money in cash. All costs ofthe trade need to be in the account before the trade is placed. For example, if youwanted to buy 100 shares of EMC at 851/2, you would have to pay $8,550 plus commissions up front. If EMC were to rise to 901/2, the account would show an open position profit of $500, or a 5.8% return on investment (ROI), not includingcommissions.
Return: The income profit made on an investment.Return on investment (ROI): The reward on a trade divided by the trade’s risk.
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73
In contrast, margin trades allow you to put up a percentage of the total cost of thetrade amount in cash and the rest is “on account.” The term “margin” refers to theamount of money an investor must pay to enter a trade, with the remainder of thecash being borrowed from the brokerage firm. The shares you have purchased secure the loan. Most traders prefer a margin account because it allows them to leverage assets in order to produce higher returns. In addition, a margin account isusually required for short positions and options trading.Brokerages are usually willing to lend you 50% of a trade’s cost, but often require a certain amount of money be left untouched in your account to secure theloan. This money is referred to as a margin requirement. Now here’s the rub. If thestock you buy on margin goes down, you may receive a margin call from your brokerage requiring a larger deposit in your account or you will be automatically exitedfrom the position. That’s why margin trading can prove fatal to novice traders whooverextend themselves through the use of margin.Based on the rules of the Securities and Exchange Commission and clearing firms,if you want to purchase stock, margin equals 50% of the amount of the trade. At thisrate, margin accounts give traders 2 for 1 buying leverage. If the price of the stockrises, then everyone wins. If the price of the stock falls below 75% of the total value ofthe initial investment, the trader receives a margin call from the broker requesting additional funds to be placed in the margin account. Brokerages may set their own marginrequirements, but they are never less than 75%—the amount required by the Fed.Margin call: A call from a broker signaling the need for a trader to deposit additional money into a margin account to maintain a trade.
Of course, brokers don’t lend money for free. They charge interest on the loanamount over and above the commissions on the trade. The interest and commissionsare paid regardless of what happens to the price of the stock. The margin’s interestrate is usually broker call rate plus the firm’s add-on points. This rate is cheaperthan most loans, as it is a secure loan—the broker has your stock, and in most caseswill get its cash back before you get your stock back.Margin on short selling is extremely expensive. In general, you have to be able tocover the entire cost of the stock plus 50% more. However, this value changes as themarket price fluctuates. Selling short only works if a drop in the market price occurs.But if the stock price rises, you will eventually have to buy back the stock to cover yourposition for more than you received for selling it. If a stock has been heavily shortedand the price starts to rise, a buying flurry among short sellers occurs, and this activitycan drive the price even higher. If the price rises, you will receive a margin call fromyour broker requesting more money to cover the increase in the price of the stock. Ifyou don’t have enough money to cover the difference, you will lose your position.Ultimately, there are no absolutes when it comes to margin. Each brokerage setsits own requirements according to company policy. Combining the buying and selling of options and stocks may create a more complex margin calculation. However,these strategies usually have reduced margin requirements in comparison to just
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buying or shorting stocks alone. Since every trade is unique, margin will depend onthe strategy you employ and your broker’s requirements.Margin calls are a reality that traders have to deal with every day. Unless youhave a crystal ball that forecasts the future, there are no sure bets. Obviously, thelarger your capital base becomes, the less you have to worry about margin. But it’salways a good idea to keep margin in mind and do not let yourself get overextended, no matter how enticing that “just-one-more” trade looks.If you’re worried about the margin at the initiation of the trade,you probably shouldn’t place the trade. This guideline can keepyou from putting on positions that are larger than you can really handle.
GETTING THE LOWDOWN ON QUOTESThe Internet has made the process of reviewing stock prices (or quotes) extremelyeasy. There are hundreds of sites that provide quote services. Some provide realtime quotes, but many more are delayed by at least 15 to 20 minutes. If you want toreceive streaming real-time data on a portfolio of stocks and options, you must bewilling to pay for it (check out eSignal at www.dbc.com). You can also visit the exchanges directly or simply use your brokerage’s online quoting service.One of my earliest remembrances of the stock market is looking in the newspaper and being overwhelmed by the sheer volume of tiny little numbers in the business section. It’s hard to look at those numbers and not be psyched out by theobvious complexity of the markets. Although the Internet has done a lot to temperthis situation, understanding the meaning behind the numbers still takes time. It’seasy to get a detailed quote at the click of a mouse (see Figure 3.8), but understanding what those numbers mean and why are they important is another story.When you look up a stock’s price, each quote is followed by several categories
Figure 3.8
Snapshot Quote for Qualcomm (QCOM) (Courtesy of Optionetics.com)
TYPES OF ORDERS
75
that describe various price values and additional data. These tiny numbers conveyenough information to give you a general feel for a stock. Do not confuse this firstimpression for knowledge. If you want to get to know a stock, you have to look a lotdeeper than a snapshot quote. Even though you can’t judge a stock by its cover, youcan use these basic numbers to get the lay of the land.The most immediate number is known as the last and represents the last knownprice for the stock. Obviously this price varies depending on whether you are receiving a delayed or real-time price. The next thing to keep in mind is the bid-askspread. As previously explained, as an off-floor trader you buy at the ask price andsell at the bid price. The last price is usually somewhere between the two. The openprice tells you at what price the stock started out at the beginning of the day, and thehigh price lets you know the highest price the stock has sold for that day. All ofthese prices give you a feel for how the stock has been trading that day. Figure 3.9provides a review of the most popular terms used in everyday quotes.A snapshot quote is just the beginning of the research process. True researchingof a stock takes a variety of forms, and the selection process you choose has to fityour objectives. But you can be sure that it will combine elements of the three basicanalytical approaches: fundamental, technical, and sentiment analysis. Each ofthese important methodologies has its own set of tools that are used to assess wherea stock has been and where it’s headed. Entire books have been written about eachof these analysis approaches. But since this book is dedicated to helping you develop the ability to filter out too much information, I will restrict my discussion ofthese subjects to the contents of a few chapters (Chapters 7 through 10).Fundamental analysis: An approach to trading research that uses economic andproduction data to determine a company’s fair value and to forecast future stockprice movements based on balance sheets and income statements, past recordsof earnings, sales, assets, management, products, and services.Technical analysis: Built on the theory that market prices display repetitive patterns that can be tracked and used to forecast future stock price movement,technical analysis is a method of evaluating securities and commodities by analyzing chart patterns and statistics generated by market activity, such as pastprices, volume, momentum, and stochastics.Sentiment analysis: An attempt to gauge investor sentiment by analyzing thesubconscious of the marketplace through the use of specific psychological market criteria. The interpretation of these criteria is not cut-and-dried; hence, theutilization of psychological market indicators depends on a trader’s unique interpretation of the facts (as do fundamental and technical analysis as well).
TYPES OF ORDERSTo do any job well, you have to use the right tool for the right job. So as a trader,you have to find a good trade and use the right order technique that will enhance thetrade’s success. In short, you have to decide how you want to place it. There are a
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Data
Definition
Last
The last price that the option traded for at the exchange. Fordelayed quotes, this price may not reflect the actual price ofthe option at the time you view the quote.
Open
The price of the first transaction of the current trading day.
Change
The amount the last sale differs from the previous tradingday’s closing price.
% Change
The percentage the price has changed since the previousday’s closing price.
High
Highest price for the current trading day.
Low
The lowest price for the current trading day.
Bid
The highest price a prospective buyer (floor trader) is preparedto pay for a specified time for a trading unit of a specifiedsecurity. If there is a high demand for the underlying asset, theprices are bid up to a higher level. Off-floor traders buy at theask price.
Ask
The lowest price acceptable to a prospective seller (floortrader) of the same security. A low demand for a stocktranslates to the market being “offered down” to the lowestprice at which a person is willing to sell. Off-floor traders sellat the bid price. Together, the bid and ask prices constitute aquotation or quote, and the difference between the two pricesis the bid-ask spread. The bid and ask dynamic is common toall stocks and options.
52-Week High
The highest price the stock traded at in the past 52-weekperiod.
52-Week Low
The lowest price the stock traded at in the past 52-weekperiod.
Earnings per Share
The bottom line (net pre-tax profit) divided by the number ofshares outstanding.
Volume
The total number of shares traded that day.
Shares Outstanding
The total number of shares the company has issued.
Market Cap
Shares outstanding multiplied by the closing stock price.
P/E Ratio
Stock price divided by the earnings per share; P = Price/E= Earnings per share.
Exchange
This indicates where a company lists, or registers, its shares(e.g., New York Stock Exchange).
Figure 3.9
Quote Term Definitions
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wide variety of order techniques you can apply to help your trade work out. Figure3.10 provides a brief review of various ordering types.There are two extremely popular ordering techniques: the market order and thelimit order. The difference between a market and a limit order is simple. Entering amarket order means you’re willing to pay the lowest asking price at the time yourorder hits the trader selling it. That price may or may not be the price quoted! Markets move quickly with the new technology that exists, and someone may have entered a huge buy order two seconds before yours hit, nudging the “best ask” priceup a quarter point just before your order arrives on the floor. It sometimes works toyour favor, too. The final execution price is called a fill. Good fills, bad fills—it’sthe risk you take when you enter a market order. But one thing’s clear: If you entera market order, you’re going to get filled very quickly more times than not.A limit order indicates that you are willing to pay the price you say or less, period.If you say, “I’d like to buy 100 shares of EMC at 85,” then you have entered a limitorder that requires your broker to purchase 100 shares of EMC only if he (or she) canget the order filled at $85 per share or less. A limit order does not guarantee execution, but it does guarantee that you’ll get the price that works for your strategy.
GETTING STARTEDIn Chapter 1, we figured out how much money you can and should invest. In Chapter2, you learned how to open an account at the right kind of brokerage for you. Next, youneed to determine the length of time the money will be in the market. If you’re a recentcollege graduate your risk parameters will be very different from those of a person setto retire in 18 months. Time should be considered along with risk because when youwill need to have the money will indicate to a great extent how you should invest.Before they invest a penny, most people want to know: Can