Chapter 5. Building Wealth with Stocks

In This Chapter

  • Understanding stock markets and indexes

  • Buying stocks the smart way

  • Understanding the importance of price/earnings ratios

  • Learning from past bubbles and periods of pessimism

  • Sidestepping common stock shopping mistakes

  • Taking steps to improve your chance of success in the market

Some people liken investing in the stock market to gambling. A real casino structures its games — slot machines, blackjack, roulette, and so on — so that in aggregate, the casino owners siphon off a healthy slab (40 percent) of the money that people bring with them. The vast majority of casino patrons lose money, in some cases all of it. The few who leave with more money than they came with are usually people who are lucky and are smart enough to quit while they're ahead.

I can understand why some individual investors feel that the stock market resembles legalized gambling. So why bother with the stock market if it's so confusing and filled with people who are eager to separate you from your money? In Chapter 2, I discuss the potential risks and rewards of different investments. Shares of stock, which represent portions of ownership in companies, offer a way for people of modest and wealthy means, and everybody in between, to invest in companies and build wealth.

Fortunately, the stock market isn't a casino — far from it. History shows that nearly all long-term investors can win in the stock market because it appreciates over the years. I say nearly because even ...

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