Sivy on Stocks

Frequently asked questions II
Should you buy stock on margin? Does technical analysis work? More...
August 18, 2004: 10:13 AM EDT

NEW YORK (CNN/Money) - Q: Should you buy stock on margin?

A: Buying on margin -- or purchasing shares with borrowed money -- greatly magnifies the risk of stock ownership. If you buy a stock on margin and it starts to sink, your broker may call in the loan and force you to sell at the worst possible time.

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But even if you don't face the dreaded margin call, buying on margin is usually a bad deal.

It's true that margin enables you to purchase more shares than you otherwise could, and if the stock soars, you can win big. But your extra gains are reduced by the cost of interest on your margin loan -- so it's tough to come out ahead.

If you do use margin for a bargain you can't bear to miss, don't allow the debt to total more than 20 percent of the value of your portfolio.

Q: Does socially conscious investing make sense?

A: Denying capital to a business you disapprove of is a perfectly reasonable political act. But it doesn't apply to stocks. Refusing to buy shares in companies you dislike (say, tobacco makers or companies with a poor record of promoting diversity) doesn't deny them anything -- when you buy a stock, the money goes to the previous shareholder, not the company.

And even if you could contribute to depressing a stock's price, that only makes the shares more attractive to value investors, who are likely to buy and push the price back up.

Socially conscious investing can work to effect change when there is a large-scale coordinated effort, as was the case with the anti-apartheid boycott against South Africa. For the most part, though, you'd be better off investing to maximize your return and then giving some of your profits to charity.

Q: Does technical analysis work?

A: It depends on how you define it. I don't believe that patterns in stock charts predict the future any better than astrology does. But I do think some forms of technical analysis can provide helpful insights.

Rising trading volume for a stock, for example, is generally a positive sign. And strong volume on up-days is a positive sign for the overall market.

Another useful indicator is market breadth -- when more stocks are rising than falling, it's usually bullish. It's also good if different stock indexes move up together.

But if major indexes head in different directions, that divergence may be a signal that a bull market is running out of steam.

Q: Is there any reason to own gold?

A: Keeping some money in investments that would benefit from resurgent inflation is a worthwhile form of insurance. Real estate investment trusts, oil and gas producers or other commodities stocks (including copper, aluminum and forest products) work pretty well.

But gold remains the purest inflation hedge. So it makes sense to invest 5 percent of your money in gold-mining shares. Gold coins, on the other hand, aren't really an investment. Don't bother with them unless you plan to take up coin collecting.  Top of page

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