Last week’s answer

More than 30 years ago, my founder faced massive legal bills after a car accident. When he realized that people can protect themselves financially through insurance from all kinds of catastrophes (such as death, disease and natural disasters, but not from legal bills), he created me. For around $200 per year, my (more than a million) members are entitled to services such as will preparation, contract reviews, audit services, motor vehicle legal defense services, trial defense services and discounts on other legal services (some hourly limits apply). Based in Oklahoma, I rake in some $300 million per year. Who am I?

(Answer: Pre-Paid Legal Services).

Gone fishing

In the early ’70s, when the market began its nose-dive, I liquidated my portfolio of AT&T, which at the time was trading around $60 per share. I then bought many shares of TWA at $28.

The year before, it was trading at $108. As it continued to fall, I bought more and more, much of it on margin (borrowing money from my broker). After weekly margin calls requiring me to cough up from $200 to $800 because of the falling stock price, I finally sold at $17 per share. I’ve since limited my bottom fishing to halibut! Â Steve Fanter, Escondido, Calif.

The Fool Responds: Ouch. It’s often not good to “average down,” buying more shares of a stock as it falls, to lower your average buying price. It works well if a healthy company is temporarily in a slump, but not when a firm is in serious trouble from which it may not recover. If you’re not sure which is the case with a falling stock you own, don’t buy more. Margin should be avoided, too, or used in moderation.

The dangers of debt

According to CardWeb.com, the average national credit card rate dropped from roughly 16.5 percent to 14.5 percent throughout 2001. Good news for borrowers, right? Well, not for all.

With the economy recessed, many people are buying and charging less, and are having trouble paying their credit card bills. In response, many lenders have jacked up the rates that they charge their riskiest customers  up to as high as 35 percent. (These include those with poor credit histories, as well as many with little or no credit histories, such as college students and immigrants.) The increases are explained as necessary, covering risks borne by lenders.

A recent Associated Press article described a single mother who earns $58,000 and owes $23,000 on several cards. Since her average rate is 20 percent, she must cough up $4,600 annually to cover interest payments alone. To reduce her balance, she must pay even more. If she needs to charge any additional expenses to her cards (which can happen despite best intentions, such as in the case of illness or automotive crises, for example), then her situation will become even more dire.

Pay off your credit card bills in full each month, if you can. If you can’t, learn to dig yourself out of debt at www.Fool.com/credit. Many people have dug themselves out from under tens of thousands of dollars of debt. It can be done!

Kinds of investors

A good way to understand what kind of investor you are, or want to be, is to survey many different investing approaches. Here’s a brief, non-comprehensive rundown of some biggies.

 Value investors: These folks focus on fundamentals of companies, such as cash flow and expected earnings, aiming to buy stocks for significantly less than they deem the stocks to be worth.

 Growth investors: These investors seek rapidly growing companies. They’re frequently ready to pay top dollar for such companies, expecting stock values to keep rising as the company grows.

 High-yield investors: These folks are primarily looking for cash-generating holdings that offer modest risk. They tend to focus on bonds and stocks with high dividend yields, such as real estate investment trusts (REITs) and preferred stocks.

 Large-cap and blue chip investors: These investors prefer large, established companies with proven track records of profitability. (Examples: Procter & Gamble, IBM, General Electric, ExxonMobil.)

 Small-cap investors: These sorts are drawn to smaller, younger firms, which can be risky, but also offer the chance of greater reward, as they can grow more quickly.

 Mutual fund investors: These people choose to invest in mutual funds, where their money either keeps pace with a particular index or is invested in holdings selected by professional money managers. (Learn more at www.fool.com/funds.)

 Motley Fool investment strategy investors: These folks follow one or more of our business-oriented investing strategies, such as Rule Makers, Rule Breakers, Drip investing and the Small-cap Foolish 8. (Learn more at www.fool.com/strategies.htm.)

 NAIC investors: These investors follow the teachings of the National Association of Investors Corp., the respected association that has promoted investment clubs around the world for 50 years. (Learn more at www.better-investing.org.)

 CANSLIM investors: These people follow the approach advocated by William O’Neill and the newspaper Investors Business Daily. (Learn more at www.investors.com and www.canslim.net.)

All these styles are not necessarily mutually exclusive. Your personal investing approach can easily incorporate several.

You may look for large-cap companies that are good values, for example, or high-yielding mutual funds.

Odd lots and commissions

Is there any way for me to buy odd lots (say, 10 or 25 shares) of listed common stock without paying a thousand dollars to some DRIP first? Must I buy round lots of 100 shares? Â Mike Schub, via e-mail

Rejoice! First off, DRIP plans (dividend reinvestment plans, which permit you to buy stock directly from companies, bypassing brokers) usually have very modest fees, making them especially useful for investors with limited means.

Better still, know that most brokerages don’t restrict how many shares of stock you can buy. You can buy 13 shares, or 76 shares, or even just one share. You should pay attention to what percentage of your investment is going to commissions, though.

If you’re spending $250 on 10 shares of a $25 stock, but are paying a $15 commission to your broker, then that represents 6 percent of your investment, which is too costly (15 divided by 250 is 0.06, or 6 percent). Aim to pay no more than 2 percent in commissions. If you buy $750 of stock in a company and pay a $15 commission, then that’s 2 percent. Some brokerages sport commissions as low as $8 (sometimes lower) Â with a $400 investment, an $8 commission is just 2 percent.

Can you recommend any books on retirement issues? Â C.R., West Palm Beach, Fla.

Try “The Retirement Sourcebook” by Mary Helen Smith and Shuford Smith (McGraw-Hill, $18.95) or “How To Retire Happy” by Stan Hinden (McGraw-Hill, $14.95).

Grab your 15 minutes of fame and ask a financial question or share your thoughts with Fool co-founders David and Tom Gardner on The Motley Fool Radio Show on National Public Radio.

Call anytime toll-free at (866) NPR-FOOL.