Stock market exchanges
When it comes to investing, most people try their luck in the stock market. The two main stock market exchanges in the U.S. are the New York Stock Exchange (NYSE) and the Nasdaq. Every publicly-traded stock is listed on a certain exchange, where buyers and sellers are able to conduct their business.
Each exchange keeps tabs on supply and demand, which is directly linked to the price of every stock. A lot of factors can affect the movement of a stock. For example, the release of a new, revolutionary drug can push a pharmaceutical stock upwards. Conversely, a retailer with a dismal quarterly earnings report in comparison to the same quarter a year ago can cause its shares to sink.
How do I go about buying stocks?
Buying a stock is not the same as going to the grocery store, picking out tomatoes, paying at the register and heading home. Investing in a company requires a little more work, but buying a stock is completely doable with the right help.
Individual traders are represented by a broker, which you can usually find online nowadays. The broker will walk you through the process of investing in the stock, which you do through the broker, who then buys and sells stocks from your portfolio — both under your guidance and on your behalf. They will likely make trade suggestions based on their expertise, which you can then follow or ignore.
What is a stock market index?
One of the first things to understand about investing is what a stock market index is and how it functions. Every publicly-traded company lists their stock through an index, which is designed to segment stocks based on their industry or other factors. Some stock market indices are weighted differently compared to others, meaning that its overall movement varies on a number of factors.
If the biggest technology index is rising, that means that, overall, tech stocks are performing well on a particular day, week, month or year. However, other indices list companies in a variety of sectors. It is important to look at more than one index to make informed decisions.
What is a stock market index? (Continued)
The largest indices in the country are the Standard & Poor’s 500 (S&P 500), the Nasdaq Composite and the Dow Jones Industrial Average. These are the core indices people refer to when monitoring stock performance. All of these indices help to measure the overall performance of the market.
An index’s performance can help you garner an understanding of how well your portfolio is performing. It is also important to keep a close eye on indices as a whole because you can invest on the entirety of their performances as well. We will break down how each of these indices compares to one another.
The Dow Jones Industrial Average
The Dow is one of the most common and oldest indices in the world, containing the stocks of 30 of the biggest companies in the U.S. The index is a price-weighted index, which adds the per-share price of the stocks of each company within it and divides it by the number of companies to determine the average.
This index amounts to roughly a quarter of the value of the country’s entire stock market. Some of the companies monitored by the Dow include Apple, Coca-Cola, Goldman Sachs, The Home Depot, IBM, Intel, McDonald’s, Microsoft, Nike, Verizon, Visa, Walmart, and Walt Disney.
The S&P 500
The S&P 500 is another one of the biggest indices in the country, although it is more widespread and diverse than the Dow. It consists of 500 of the most commonly traded stocks in the United States, amounting to roughly 80% of the total value of the country’s stock markets.
The S&P 500 index monitors the performance of companies in a number of sectors, including energy, industrials, healthcare, information technology, financial and consumer staples. Chances are if there is a stock you are interested in, it will be included in the S&P 500. If not, there is always the Wilshire 500…
The Wilshire 5000
The Wilshire 5000 is often referred to as the “total stock market index,” as almost every publicly-traded company headquartered in the U.S. with public price data is included in the index. It originally consisted of 5,000 companies but now includes data from more than 6,700 public businesses.
The index was finalized in 1974 and it is one of the most diverse out there, as it has stocks from every industry. Although the Wilshire 5000 has more information than other indices, its performance is not as consequential to the stock market compared to the S&P 500. So what is the most consequential of all the indices?
The Nasdaq Composite Index
Without a doubt, one of the most important indices in the stock market today is the Nasdaq Composite Index. It is considered to be the major exchange in which technology stocks are traded, which is one of the most impactful and influential industries in 2018.
The Nasdaq Composite Index also has stocks from other significant industries such as insurance, industrial, financial and transportation. The Nasdaq Composite differs from the Dow and the S&P 500, in that it includes companies of all sizes, including smaller businesses with far lower market capitalizations. But what about smaller indices?
The Russell 2000
One of the less consequential stock market indices in the United States is the Russell 2000. This stock market index contains data from 2,000 of the smallest stocks in the Russell 3000, which is an index of the 3,000 largest publicly-traded companies based on their market capitalizations.
The Russell 2000 first began to gain traction in the 1990s, along with the rise of small cap stocks, which investors found to be fruitful investments to diversify their portfolios. The index helps to give you an idea of the daily performance of smaller companies in the market. Now that you understand the indices, we can dive into the markets.
What are bull markets and bear markets?
You have probably heard of the terms bull market and bear market without fully knowing what they entail. A bear market usually means that stock prices are on the decline. According to some financial experts, a 20% decline across various indices is indicative of a bear market.
The United States experienced a bull market for close to nine years as a result of the economic downturn sparked by the 2009 housing crisis. This made for the second longest bull run in American history, second only to the Great Depression. So, that begs the question, what does a bull market entail?
What are bull markets and bear markets? (Continued)
A bull market usually means that stock prices are on the rise, which is usually followed by a bear market and vice versa. A bull market often means that investors are confident, which pushes them to spend more and further stimulates the economy.
Meanwhile, a bear market means that investors are being more cautious about their investments, so they are putting less money into the market, which could result in an economic downturn. Bull markets usually outlast bear markets, which is why stocks will likely net you money over various decades if you hold on to your investment. So what should you invest in?
What to invest in? – Stocks
Arguably, the most popular investment route for many is to buy company stocks, which can help them garner wealth if the company’s performance improves. Buying a stock means that you own a small piece of a specific company, which can increase based on a number of factors.
A company’s quarterly earnings are the main factor that moves their business in one direction or another, and there are several factors that go into strong earnings results. If done right, releasing new products, restructuring a business plan, having a marketing strategy that works, and scaling up can all have positive impacts on a company.
What to invest in? – Bonds
Investing in stock requires a willingness to assume a certain degree of risk. If you are hoping for more of a long term, slow drip investment, bonds are the way to go. They consist of lending money to a company or institution with an interest rate.
For example, you could lend money to a retailer to help them build a new manufacturing warehouse or to improve worker conditions. A bond is a loan to a company that it can use to grow its business and make money over various decades as the interest continues to accrue. But bonds aren’t your only investment option…
What to invest in? – Mutual funds
Another good investment option, particularly for beginners, comes in the form of mutual funds. This is a way of owning stocks and/or bonds that you put towards a pool of money that a fund manager helps to collectively invest. The fund manager works to find the highest yield possible at the lowest risk.
Mutual funds can be held in your retirement accounts, such as your 401(k) or Roth IRA. They are relatively easy to understand and they allow you to diversify your investments over various companies. Mutual funds do charge fees, however, which can take a toll on your profits.
What to invest in? – Real estate
Another popular investment route is the real estate market, which some people believe is the only worthwhile investment. One of the most common ways of investing in real estate is by buying a home to live in, as well as other properties to rent out to tenants.
Alternatively, you can also acquire a security called a real estate investment trust (REIT). This essentially gives you all of the benefits of stocks, but in a more tangible manner because it is represented in the form of land, apartment buildings, shopping malls or other property. Still, there are other ways of investing.
What to Invest in? – Other
There are other ways to invest your money and watch it grow without ever buying a stock, bond, mutual fund, property or real estate security. Many people prefer to invest their money somewhere safe, such as in a family owned business.
There are also investments for those who are not averse to risk and who don’t mind rolling the dice, such as cryptocurrencies. Bitcoin, the most well-known cryptocurrency, proved to be a very valuable investment several years ago, but it has declined significantly in 2018. Nevertheless, many investors are searching for the new Bitcoin, which could grow your money exponentially.
Most stockbrokers will recommend that you diversify your portfolio, which means that you should invest your money in a variety of assets. Putting all your money into one company can hurt you greatly if the company faces regulatory issues or if its leadership does not perform up to par. You wouldn’t want to lose your entire retirement fund as a result of one company’s actions.
Instead, you should invest in multiple stocks, mutual funds, bonds and/or real estate, as you are playing the numbers game. Ultimately, you are hoping that you will have more successful investments than unsuccessful investments. So what is the key to diversification?
Creating a diversified portfolio is not easy and it is not something you can just do overnight. Even if you have a large amount of capital to invest, it still requires a great amount of patience and research to have a successful and well-diversified portfolio.
You can even participate in an exchange-traded fund (ETF), which essentially means that you are investing in an index’s performance or the collective performance of all companies in it. Some believe that the best way to diversify your portfolio is by dedicating 10% or less of your capital to individual stocks, while the rest should go to index funds.
How to start the process of picking stocks
Now that you have enough background about the basics of the stock market, we can help you get started with the process of picking stocks. The first step is to sign up for a discount brokerage account with companies that have a successful track record, such as TD Ameritrade and E*Trade.
You will need to be at least 18 years of age, unless you have the consent of a guardian or custodian, to set up a brokerage account. The site you choose will also ask you to verify your identity through your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
How to start the process of picking stocks (continued)
Once you have set up your brokerage account, then the real fun begins. The next step is to transfer funds from your bank account into your trading account, so you can start making decisions that will help you build for the future. You will want to think hard about how much money you will want to transfer to begin with.
While you should now be able to buy stocks, bonds, mutual funds, and other securities, a lot goes into choosing the right stock or other assets. You can choose which assets to invest in on your own or obtain the advice of a financial planner.
Challenges with picking your own stocks
We highly recommend that you get the help of a professional with your own stock, as exploring the market on your own can be difficult. You’ll have to keep up with the stock market on a daily basis if investing on your own, while also deciding what your risk comfort level looks like.
Plus, even if a stock seems amazing, the market is unpredictable and no one can ultimately predict the fate of even the biggest company. Investing in stocks is a business, which means that you can’t use your emotions to make an investment, as every decision needs to be based on logic and analysis.
Suggestions if you decide to invest on your own
As previously mentioned, you should diversify your portfolio with various stocks and other assets that are in line with your personal level of risk tolerance. Buy assets that can handle the ups and downs of the stock market as a whole, such as bonds.
Additionally, it is natural that there will be wild dips and impressive highs, but you should not get carried away regardless as the market fluctuates frequently. It is also important to determine what your own biases are so you can rid yourself of them in order to make more well-informed decisions. Remember, you don’t have to go it alone.
Professional portfolio managers can help you
The smarter route would be to seek the help of a professional portfolio manager. Although they do charge a fee, they will likely make you more money in the long run. These managers can help you pick mutual funds that help your investment grow. A good portfolio manager will also factor in where you are in your life, your future goals and comfortability with taking on risk in their recommendations.
Nevertheless, you are still a part of the decision-making process and it is up to you to decide if you want to go with your manager’s recommendation or not. Even with mutual funds, you should diversify your portfolio. to minimize risk and create opportunities to grow your investment.
Should I invest in ETFs and index mutual funds?
Placing a bet on one of the major indices can have some serious upsides, although there are no guarantees with the financial markets. The tech sphere has been strong lately, which means that investing in the Nasdaq Composite may be quite profitable moving forward, as the industry has been accelerating at a rapid rate.
Nevertheless, an index can be affected greatly by economic and political decisions around the world. For example, President Trump’s decision to impose imported steel tariffs caused the Dow Jones to decline by more than 500 points over the course of a single day. Current events can have ripple effects on the market.
Should I invest in ETFs and index mutual funds? (Continued)
Tracking the performance of an index can help give you an idea which ones are the most profitable at the moment. Even with the exchange-traded funds (ETFs), you should diversify your portfolio with a combination of these assets and individual stocks.
Again, your risk tolerance should be in line with the ETFs you place a bet with. Ultimately, investing on an index is a double-edged sword as you may be investing in companies you don’t believe in, but a solid performance for a few companies can help to increase the average value of the index on any given day.
Should I hire a financial planner?
Another great way to ensure that you are making the right investments is by hiring a financial planner, which can be an actual person or a robo-advisor. You can develop a personal relationship with your financial planner that will help you bring your ideas to fruition and work toward your financial objectives.
Your planner knows your goals, your risk tolerance, and how long you are willing to invest. While this person can help you select the right assets, this advising also means that your expenses will be higher to account for their services. They charge either an annual percentage or an annual fee.
Should I hire a financial planner? (Continued)
A robo-advisor is a piece of artificial intelligence that compiles your investing profiles and uses smart algorithms to help you determine the right investments for you. They will usually set you up with low-cost stocks and index funds that are in line with your profile.
If you are searching for a financial planner, make sure you find one with the right pedigree, credibility, and success rate. With a robo-advisor, the fees may be lower but the experience may be less personal. You need to figure out what matters most to you in an advisor — reduced costs or a more personal experience.
Other factors to consider
Now that you know all the basics to get you started on your investing, there’s just a few final things we’d like to mention. Make sure you consider the fees of your mutual funds, ETFs or financial planners and add that as an expense to see if your investment’s return is still a worthwhile profit.
This is known as the cost-adjusted return, which means that you subtract the cost from the return. The best thing you can do is to start investing as early as possible and hold onto an investment that you can keep untouched for at least 5 or 10 years.
One final note
Not everyone will strike gold when they begin investing, so do not get bogged down if your first few moves don’t offer you a handsome return. It takes time to understand the market, the various assets available, and the best ways to make money. Be patient with the process.
Plus, having a grasp of what your risk tolerance is, how much capital you are willing to invest, and what your investing timeframe will look like will make life better for you. Everyone has a unique investing profile, which means they have unique investing opportunities. Have fun exploring what works best for you.