There are many investors and websites with trading systems designed to advocate that you can beat the market by timing your stock purchases and exits. That is the theory with day traders. They feel that by looking at the historical movements of a stock and where certain technical indicators are, the entry and exit points will be identified. To a small extent, this is possible but not for the long-term growth expectations of making a profit on stock investments.

The thing is that common stocks have volatile returns. That is why they have potential for better returns. Historically investors have suffered negative annual returns 27% of the time. If someone had a crystal ball and could without error predict the turnings of the stock market, they would be rich from their investments and the selling of advice. The truth is that no one has a crystal ball.

Roger C Gibson in his book “Asset Allocation” gives an example. Say in 1925 you found a person who had a crystal ball, so to speak. That is they could predict accurately what the stock market was going to do the next year. You follow their advice and at the end of 1926 your $1.00 investment grew to $1.12. Year after year you follow this market timers advice and never have any down y ears. By the end of 1998 your investment would be worth over $20 million instead of the actual best –performing investment alternative. Small company stocks during the same period had an ending value of $5117.

With this example, Mr. Gibson tried to point out that no one is able to predict accurately every Bull or Bear market. A great investment axiom is “hind sight is 20/20”. Meaning that it is easy to predict what the market or a particular stock is going to do after the fact. It is the before the fact decisions that are difficult.

Trinity Investment Management Corporation analyzed the nine peak to peak cycles that have occurred since 1946. They found that there were about 1.7 times as many up months as down months during this period. The average bull markets is up 104.8 percent versus the average bear market of -28 percent. Bull markets lasted nearly three times as long as bear markets and the shocker is that even in bear markets, there were on average about 3 – 4 up months out of 10 months.

A study by Robert H Jeffrey concluded “ No one can predict the market’s ups and downs over a long period, and the risks of trying outweigh the rewards”. He went on and commented “The rationale for being a full-time equity investor is not that there are more positive real return periods than negative ones in most time frames, but rather that most of the “positive action” is compressed into just a few periods, which tend to follow particularly adverse times for stocks”.

In another study Jess S Chua and Richard S. Woodward concluded “Overall, the results show that it is more important to correctly forecast bull markets than bear markets. If the investor has only a 50 percent chance of correctly forecasting bull markets, then he should not practice market timing at all. His average return will be less than that of a buy-and-hold strategy even if he can forecast bear markets perfectly”.

William F. Sharpe concluded that “a manager who attempts to time the market must be right roughly three times out of four, merely to match the overall performance of those competitors who don’t. If he is right less often his relative performance will be inferior”.

The conclusion then is the long term investor, which is what we should all be, should enter for the long run. Establish a good strong diversified portfolio and stick with it through the ups and downs.

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A simple definition of stocks is a share of ownership in a particular company.  You may also hear them referred to as stock shares or equity.

In the old days before computers, a stock share was identified with a certificate.  When you purchased stock in a company, you were issued a stock certificate with the number of shares you had purchased.  You then placed this certificate in a safety deposit box and maintained possession of it as you would any other asset.  This is not necessary with the advent of computers.

When a company wants to generate cash for its continuing operations or to purchase a company, it can either borrow the money or it can issue stock.  That is it sells a portion of the ownership of the company to whoever purchases the stock.

Holding a company’s stock means you are a part owner of the company.  Technically you do own a small part of each of the assets of the company and are entitled to a share of the earnings or loss of the company.  You also can vote on the leaders or officers of the company and certain regulations or changes the company wants to make.  Once a year you can even attend a shareholder meeting where you can meet the officers and vote in person.

Since you own a portion of the company and are entitled to a portion of the company’s earnings, when the company does well or the other owners or potential owners think the company will do well, the value of your stock increases.  That is, someone is willing to pay more for a share of stock because of the belief that the value will increase in the future.

In addition to the potential increase of your investment through the increase of the cost of a share of stock, some companies also pay dividends.  They will pay a sort of interest on the amount of shares you own.  They are choosing to share a portion of their earnings directly through this process.

There are two types of stock.  One is called common stock and the other is called preferred stock.  Even though it is called preferred stock, it is generally not the preferred stock to own.  It is called preferred because if there are any dividends paid, they are paid to the preferred stock owners first.  Also in a liquidation of the company, the preferred stock owners will get paid first.  However, the preferred stock owners do not have the right to vote on the officers and the value of their stock will generally not increase on the open market.

Another benefit of common stocks is that they are highly liquid for the most part.  There is usually always a market where the shares can be traded.