Investing 101: Basics of Stocks
Most of you have heard about stocks or bonds in conversation. Maybe your loudmouth cousin keeps telling to buy Tesla stock. Maybe you've heard of stories of people who lose all their money in the stock market.
For our Investing 101 series, we will review what these common assets are, starting with stocks. Stay tuned for Investing 201, where we unpack common misconceptions and Investing 301 for investing strategies!
As a definition, investing is simply putting money into an asset (stocks, bonds, real estate, cash) and expecting a return.
Stocks are investments that represent shares in a public company. All public companies have stocks that trade on a stock exchange. The company's share price represents the company's value, once you factor in any debt or cash the company has. This company's value is called the company's market capitalization.
All companies have "tickers" that are a quick few letters investors use to find the stock. When you want to buy a stock, you'll be asked to input the ticker. That's the most accurate way to make sure you're buying the right company.
Common public companies in the news include Netflix (NFLX), Facebook (FB), Telsa (TSLA), and United Airlines (UAL).
Some companies pay out quarterly dividends, which are payments to shareholders. Dividends are popular for retirees and anyone seeking regular income. Companies try to keep dividends as regular as possible for shareholders but they have the option to cancel these at any time. During COVID-19, we've seen cancelled dividends often. That's why we don't encourage you to rely on dividends as your only source of cash.
Stock Price Changes
You buy stocks as an investment, hoping the price will go up. Stock price is a reflection of supply and demand. Stocks go up if more people want to buy that stock. Usually, this indicates that the company's "valuation" has improved but sometimes, the market gets excited or acts on herd mentality.
Issuance / Buybacks
Companies can issue more stocks (worse for existing stockholders) or buy existing stocks back (better for existing stockholders). These actions decrease / increase the small percentage of the company you own as an existing shareholder because the company is giving out more. Stock issuances are the equivalent of having a set number of people in a private park, and then inviting more people to pay for entry. You have less space in that park for yourself!
Getting Started & Recommendations
We recommend starting an investment portfolio in a tax efficient way with an IRA or company 401(k). We go into detail below with steps to get you started ASAP!
Young Money Posts
- IRA Basics: How to Use an IRA and Start Investing Soon
- Investing Lessons and Mistakes for Your Stock Portfolio
Books by Investors