Investing Without Capital

To the people talked with these past few days, the need for additional (or extra) income is never more pronounced than today, when inflation is shooting up almost anywhere in the world – courtesy of OPEC member countries who probably thought that oil prices are the ones that should be flying and not airplanes and space shuttles. They refuse to increase oil production levels to lower fuel costs.

Lots of gratitude too to financial experts, whose best way of protecting their client’s wealth erodes everyone’s purchasing power (including theirs). But when they use oil to hedge against falling U.S. Dollar (which drive oil prices even higher thereby causing inflation) they make additional tons of money. So, why care about the few percentage points of value that their money will lose, eh?

And why care about the poverty stricken people of this world (who suffer the most when prices of basic goods go up) when they can have their tons of money? C’mon, smart asset managers have to act smart. Oil happens to be the best hedging instrument vs. the dollar at the moment, why bother about inflation and poor people? Caring about the marginalized rather than their clients’ bottom line would not be good to their reputation as the best money managers, why not just be the best? Nope. We can’t expect any help from those guys.

The little people have to fend for themselves. They need that extra income which could come from anything, like a second job, a small store…or investing.

But can anyone really get investing without capital? What is there to invest if there is no capital? Can’t be done right?

Well, not exactly.

You see, the other term used in describing the stock market is – the Capital Market. It is one of the places where people, whose business plans are far greater than their financial muscles, go to raise capital. Of course, once they have sold their IPOs, secondary offerings, warrants, bonds, etc. they will have the capital to invest in their mind boggling plans. But remember, it is not their capital. It is a capital that they borrowed by selling shares (or commercial papers) to the public.

Nifty, hu? The “big guys” day-dream of hauling loads of incremental income they cannot afford. Goes to the stock exchange, fill up and sign some documents, and before you know it the profits are coming in by the trains! Happens everywhere too!

Unfortunately, the “small guys” like you and me (no matter how we are built, physically) are not allowed to play that kind of trick. It is only for the “big guys”. But before we complain about inequality and injustice or ask god to “level the playing field” let me state here that the “big guys” earned the right to play that trick.

The capital markets have rules. Normally, the “big guys” would not be allowed to sell their IPOs to fund the grand schemes they have cooked up unless they pass a certain set of criteria which, in the minimum, means running the business that they are planning to introduce to the bourse, profitably, for several years. That is one of the exchange’s ways of making sure that our “big guys” are not selling us sand castles. In short, they had a solid capital when they started their original business, the one that they are planning to spawn by selling shares to the public.

Super. Now, what about us “small guys”?

First, let’s start with the hard part. The hard part really is acceptance. To accept what we are and to accept the fact that we have to do what should be done to be able to play the trick like the “big guys”. Whoa, what on earth does that mean? It is something like this: We are the “small guys”. We know that. But instead of accepting the fact and doing what “small guys” should do – we mimic the “big guys”. We pretend that we are a big shot, and we splurge everything we got to play a role in our own world of make believe.

We buy things that we don’t need, cars that we can’t afford, clothes that are only nice because of the brand name, shoes that costs six times (6x) as much as our monthly household budget, appliances worth three times (3x) more than the value of our house and lot combined, etc. End result? We’ve spent what is inside our pay envelopes even before we receive the pay envelopes. If that is how we spend our money, where are we going to get our capital?

Okay, I have to admit, like the “big guys”, we can invest even if we don’t have our own capital. We can borrow from government social security agencies, we can borrow from our insurance companies (if we have insurance), we can borrow from our pension fund companies (if we have pension funds) we can borrow from any lender and we can borrow from banks (if we have properties that we can use as collaterals).

But don’t you give me that broad smile, yet. And if you are beginning to see a ray of hope in your mind…extinguish that and open your eyes! Because here is the naked truth: unless you are very good AND very lucky, you wouldn’t want to use borrowed money on your stock market investments. Didn’t we just say that the “small guys” can use borrowed money to use as capital for investments?

Yes, we did. But we didn’t say they’d want to do that. If the “big guys” don’t mind using borrowed money in their investments why should the “small guys”?

Here are the reasons why: 1. The money that the “big guys” borrowed bear no interest, the money the “small guys” borrowed has and it could be high. 2. The “big guys” money will not fall due for a very long time, the “small guys” money has to be repaid in a very short span of time along with interest, 3. If the “big guys” lost their capital, they only lose the capital. If the “small guys” lost their capital, they didn’t just lose the capital – they have to repay their lenders the equivalent amount (which means they lose it twice) – plus interest! Want more reasons?

What then, can the “small guys” really do to start an investment, specially, if they don’t have the capital to invest? Well, if you don’t have a capital now, you can save for it.

But I wouldn’t ask you to do that. Saving takes time and usually the savings is the first to go when an unexpected expense (like: whatever) comes up. What I would suggest is that you start looking for a broker that offer the services that would be the easiest for your pocket (on-line brokers usually charge less, but you would be on your own – which does not necessarily mean bad) and then you allocate the money for your investments.

I said allocate because you always end up spending everything you earn, anyway. It’s easier to do coz it’s just like allocating the money for that pair of shoes, or that TV or what have you that you don’t really need but still bought anyway. Consider your allocation an expense, if you will, just put it near the top of your priority list. Actually, it’s better to think of that allocation as an expense, so you wouldn’t be tempted to take it out for other purposes. Make that allocation part of your expenses every month, and as soon as it reaches the minimum amount acceptable to your chosen broker, open an account with them. Right away!

But do not buy stocks yet. Wait until after you have acquired a good amount of knowledge on how the stock market works (its Psychology and drivers), and you have carefully chosen the stocks that you want to buy.

In the meantime, keep depositing that expense allocation to your account with the brokerage house. Oh, don’t forget to check if that brokerage house is legit before you open an account with them. The legit ones are in the stock exchange’s list of Trading Participants. Make sure that the list is updated too.

Next blog, Why the Stock Market?

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