ARE YOU AN INVESTOR OR A SPECULATOR? (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

When you put money in the stock market, you can choose one of two courses of behavior. You can become either an investor or a speculator. And there's a big difference between the two.

Let's first take a look at how investors act. Investors don't chase after "hot" stocks, which can cool off as quickly as they heat up. And true investors won't waste effort trying to figure out when it's time to buy low and sell high. The fact is that nobody -- not even market "experts" -- can accurately predict when the market will reach peaks or valleys.

Rather than pursuing hot stocks or trying to time the market, true investors research the stocks they're interested in, looking for companies that offer solid management, strong products, competitive advantages and a clear plan for the future.

Then, once they find these stocks, they invest a fixed amount of money in them, at regular intervals. By following this technique, investors buy more shares when the price is lower and fewer shares when the price is high. This method of investing won't guarantee a profit or prevent a loss, but, over time, it can reduce the average per-share cost of the stock. Of course, because this strategy involves continuous investment -- regardless of fluctuating price levels -- investors must consider their ability to continue making purchases when prices are low.

That's investing. Now, let's turn to "speculating."

Speculators don't buy stocks with the intention of holding them for potential long-term appreciation. Instead, they're looking for quick gains to rack up profits and cover their commission costs. If they succeed, they sell out and move on quickly. If they fail, they cut their losses and move on quickly.

To add even more drama to their actions, speculators often fund their purchases with money that's not their own. Technically, they've been buying "on the margin" -- borrowing money from their brokers to buy shares of stocks.

How extensive is the margin-buying activity? Consider the numbers: From January 1997 through March, margin dollars held by New York Stock Exchange firms rose 180 percent. Then, in April, the market -- especially the Nasdaq Composite Index -- fell dramatically.

Investors saw this decline as a buying opportunity. But it was bad news for margin-buying speculators, many of whom faced "margin calls" during the following weeks. Margin calls are made when clients have over-borrowed, based on current market prices. Those people who receive margin calls must put additional money into their accounts. If they can't come up with the money, then their brokers can sell their stocks immediately -- possibly at a big loss. Under some margin agreements, brokers don't even need to contact clients before selling their stocks.

If you're an investor, you won't have to worry about margin calls or the other problems that afflict speculators. There's nothing glamorous about slow-and steady investing, but over the long term, it may be the key to helping you reach your financial goals.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.