Unless we are able to exercise a considerable degree of control over our emotions, civilized life is impossible. This is emotional control is important in stock market basics as well. Why is this? In a typical family, by the time a baby is a year old he has begun to learn that staging a tantrum does not always bring him favorable results. And an adult can hardly earn a living or manage children or gain the respect of his associates unless he usually can manage his own nervous reactions.

At the same time, it is customary that at certain times and places a man may give way to some of his savage emotions without losing status among his peers. At this point, a reader may think: "What exactly has this to do with a book on the cold-blooded subject of investing?" Well, the connection is that in the minds of large numbers of people, the stock market is one of those places where it is quite proper for a man to plunge in without knowing anything about what he is doing, or why. This attitude is stimulated by many brokers, to whom a cus­tomer buying on impulse is preferable to one who stops to think. It is hard to distinguish between the impulse buyers and the more deliberate gamblers. These two groups, together with the people collecting fees from them, make so much fuss that a timid observer may readily assume that the whole stock market is just a wild party, where nothing is supposed to make sense. Without stock market basics the observer will not be able to make sense of it.

Now suppose a man has learned that average results on common stock are better than on fixed-dollar investments, but he fears that exposing himself to the excited atmosphere of the stock market will cause him to do foolish things. How can he gain the advantages of owning stock without running too much risk?

The first step in stock market basics is to realize that intelligent selection of stock is a business in itself, requiring considerable information and experience. An ordinary investor needs expert assistance, which he can obtain either in the form of advice or in letting an expert manage his money. An adviser can be an individual or a big corporation operating nationally, or something in between those extremes. Where an investor can locate an adviser in whom he has full and lasting confidence, and whose fees he is willing to pay, this solves the emotional problem.

But suppose a skeptical investor wants proof that an adviser obtains good net results for his clients. An adviser's normal answer is that his reputation shows he is competent, that a client should select an adviser and then trust him, the same, as he would do with a physician or a surgeon.

A better solution for a cautious investor when looking at stock market basics, we believe, is to buy shares in one or more mutual funds. To be sure, this requires some study, but the sensible selection of a mutual fund is a simple matter compared to trying to choose among all the number and variety of corporate stock available. The job is further simplified if an investor can locate a dealer specializing in mutual funds.

For a nervous skeptic, a major advantage of a mutual fund is that it publishes tables showing exactly what net results have been obtained by people who bought its shares on certain dates in the past. Of course, the future is not guaranteed, but a fund's past performance record furnishes a solid starting point.

In choosing among mutual funds, a temperamental buyer might pay extra attention to the following points:

(1) How much diversification? The advantage of diversi­fication when looking at stock market basics is that results cannot be much hurt by a bad per­formance on the part of a few of the stocks owned. Most mutual funds spread their assets among at least fifty com­panies and a dozen industries, more than is practical for an investor acting independently, unless he is wealthy. A man who wants to go the limit on diversification can find funds with hundreds of items in their portfolios, spread among bonds and preferred stocks as well as common stocks of companies in twenty-five industries.

With broad diversification, a fund's past performance is a better guide to the future; because the fund has always owned a good many stocks, a good performance record cannot be the result of a lucky choice of just a few stocks.

(2) How much volatility? Judging by the record to date, the market price of common stock will rise and fall, and a nervous investor might as well get set for this. Diversification helps, but it by no means eliminates price fluctuation.

The fact that in stock market basics a certain fund has a fine long-term average performance record is of no help to an owner who sells out on a temporary dip in price. Some funds are several times as volatile as others. When the general stock-market level goes down, as it did in 1957 and again in 1962, the price per share of a volatile mutual fund drops faster and farther than that of a more stable fund.

A "balanced" mutual fund divides its assets among bonds or preferred stocks, or both, as well as common stocks. Nat­urally its market value per share fluctuates less than that of a fund wholly invested in common stocks. Also, the type of common stocks owned by a fund affects its volatility. So if a man gets panicky when the price of his stock drops, he had better look for a balanced fund whose record shows a com­paratively stable price.

A common rumor in the stock market is that in a general price decline the owners of mutual-fund shares, being little and ignorant people, will indulge in panic selling, thus caus­ing the value of a fund's shares to drop faster than other stocks do. There is some factual basis for this idea, as ap­plied to a closed-end investment company whose price can be lower than its asset value. But the idea is stretched to include mutual funds, and apparently is circulated by brokers who fear that the growth of mutual funds will hurt their fees. That's a little insider stock market basics pointer for you, to consider the vested interest those you get advice from.

To anyone well informed on mutual funds, this rumor is absurd. Naturally, diversified mutual funds do not attract either impulse buyers or gamblers, because a fund offers no prospect of quick, dramatic results. Thus a typical share­holder in a mutual fund is less likely to become scared than is an average owner of other stocks. During stock-market dips, the volume of redemption of mutual-fund shares has been mild.

Also, the rumor forgets that the redemption value of a share in a mutual fund is automatically set by the current market value of all the stocks and bonds it owns, so that even if many of a fund's stockholders should join in panic selling, they could not drive its redemption value below the average of all the items in its portfolio.

A simple way for a buyer to harden himself against the volatility of stock prices when dealing with stock market basics is to start with small amounts. Many advisers say: Don't buy stock until you have "adequate" life insurance and "ample" reserves. On the contrary, we believe the time for a man to begin buying stock is when his savings are quite small. Let him put a little money into stock, and watch it for a while, before adding more money.

Many investors seem to assume that the only proper way to buy or sell stock is to move a lot of capital at one time. When a family buys a house, they must buy the whole building and the land, in one deal. But in the stock market, the minimum unit can have a pretty small dollar value. An investor's mental strain in deciding to buy or sell stock is greatly reduced when he limits each action to a small portion of his capital. Most mutual funds offer standard plans for small installments in both buying and selling.

Many investors also try to be smart in the timing of their buying and selling of stock. This involves forecasting when prices will rise and fall and is recommended to any investor anxious to develop stomach ulcers. A less exciting way to buy stock is to adopt dollar-cost averaging. When a man puts in a similar amount of savings, once each three months or oftener, regardless of the current price, he is almost sure to end up with a fair average cost per share. When a man wants to sell stock, he can use the same idea.

Keeping some capital in fixed-dollar items rather than putting it all into common stock is a good idea for other reasons besides reducing nervous tension. When a man must sell some capital to raise extra cash and the price of stock happens to be down, then it is nice to have some bank de­posits or similar investments with fixed value. For more precision, an investor can adopt a standard ratio between the current market value of his stock and his fixed-dollar or reserve capital.

Borrowing money is usually necessary for a family when buying a house, and it may be wise, because in repaying a mortgage the family can probably meet the moderate month­ly payments without undue strain. But in buying common stock, whose value is apt to fluctuate, an emotional man who borrows money in order to buy is just plain crazy.

A wife's nerves are often forgotten when a man is selecting investments. Does she understand his plan, so that when he dies she will know what to do? Especially for an elderly man, a sensible rule might be that he owns no investments that will worry his widow.

In this chapter on stock market basics, the writer has drawn heavily upon his personal experience. With increasing age, he finds it neces­sary to take more pains to avoid unnecessary excitement. Practicing most of the methods given above has enabled him to sleep more soundly at night!