Dedicated to the success of the individual investor
Stock Investing FAQ
Q: What is stock? A: A share of stock is a unit of ownership in a company. Companies issue stock to raise money. Buyers of stock receive partial ownership of the company, represented by "shares". By purchasing shares, the buyer invests in the company, and in so doing stakes some of his or her fortune to the success of the company.
Q: Do all companies issue stock? A: No. Many companies, particularly small and new ones, are privately held, meaning they are owned exclusively by their founders and maybe a few close associates. That is how most companies start out. If a company is successful and needs lots of money to grow, it may decide to "go public." That's when it issues shares of stock to the public to raise the money it needs.
The first time a company offers stock to the public, that is called its "Initial Public Offering," or IPO. Later issuances of stock are called "secondary" offerings.
Q: How are stocks bought and sold? A: Stocks are "traded" (bought and sold) in stock markets around the world.
Two of the best-known stock markets are located in the USA: The New York Stock Exchange is physically located on Wall Street in NYC. The NASDAQ (an acronym meaning National Association of Securities Dealers Automated Quotations) is a market that operates through a computer system that matches buyers with sellers. Its headquarters is located in NYC.
Individual stock owners do not go to these markets themselves. Rather, they own their stock(s) in a brokerage account. Their broker does the buying and selling for them.
Q: How would I buy my first share of stock? A: You would open a brokerage account, deposit some money with the broker, and use that money to make your first purchases. Brokers operate via "orders" that are placed with them. Your broker will not do anything with your money unless and until you place an order giving instructions on what you want done.
Q: Why would I want to own shares of stock? A: As stated above, shares of stock give you a stake in the company. You participate in its successes and failures. Many studies show that over long periods of time, stocks are the only investment that keeps up with inflation. Historically, neither bonds nor cash (such as money- market accounts and certificates of deposit) keep up with inflation.
Q: Isn't there risk in stocks? A: Yes. While, as just stated, over very long terms (measured in decades), stocks have outpaced inflation, over short time frames, stocks rise and fall with the vicissitudes of the economy, the fortunes of individual companies, and the dynamics of the marketplace. As an individual investor, it is not prudent to have all of your investable money in stocks. Nor is it considered wise to have money that you will need in the next few years (3 to 5 years) in the stock market, because of the risk that it may lose value.
Q: Are there other ways to buy stocks other than purchasing shares directly? A: Yes. One way is through mutual funds, which have been around for decades. These funds-- which are highly advertised on TV, on the Internet, and in the print media--pool money from investors and make stock (and other) investments with that money. They are managed by professionals, which can be their upside, Their downside is that they charge fees, which eat into your returns. Many stock investors get started by buying mutual funds. For many people, funds are the best way to own stocks. There are literally thousands of mutual funds to choose from.
Another way to own stocks is through Exchange-Traded Funds (ETFs). These are mutual funds that are traded on stock exchanges as if they were stocks. (Traditional mutual funds, by contrast, are bought from and sold back to the mutual fund company.)
Q: What is a ticker symbol? A: A ticker symbol is simply a universal shorthand for the stock of a company. Ticker symbols save time and space. Some ticker symbols are easily recognizable (for example, the symbol for General Electric is GE). Other symbols, even for well-known companies, are obscure (the symbol for Coca-Cola is KO).
Your brokerage can give you the symbol for any stock. Financial and brokerage websites also have look-up functions that help you find ticker symbols.
Q: How do I know what stocks to buy? A: To be a good stock investor, you need a plan. At its highest level, your investing plan does not address what stocks to buy. Rather, it addresses your overall investment goals and strategies for reaching your goals. Depending on your age, how much money you have, and your individual circumstances, stocks may or may not end up being part of your overall plan.
If your investment plan does include stocks, you must educate yourself about them. You need to decide whether to buy stocks via mutual funds, ETFs, or individual stocks directly. If you intend to buy individual stocks, you should do research on the companies you are interested in.
There are many good books to help you get started. Most brokerages also offer educational materials. Some worthwhile educational information can be found on the Internet. I have written a variety of articles on stock investing, focusing in recent years on investing in dividend growth stocks. Click here to access a list of my articles.
Q: What are the steps to becoming a good stock investor? A: As mentioned above, the first step is to have an overall plan that covers your entire investing goals. The second step is to decide whether to invest in stocks via mutual funds or by purchasing shares in individual companies.
If you decide to purchase stock in individual companies, there are three essential steps to becoming a good stock investor:
Pick good companies to invest in.
Value their stocks accurately (that is, decide what is a fair or advantageous price to pay for those stocks).
Manage your portfolio skillfully.
My book, SENSIBLE STOCK INVESTING: How to Pick, Value, and Manage Stocks covers these steps and provides the background you need to be a successful stock investor.