Find answers to the most frequently asked questions we get about some of the basics of investing.
The thought of investing may seem like a daunting prospect to many. We’re here to debunk that myth and spread the news that investing is for everyone. Here at MyWallSt, we receive a lot of questions about some of the basics of investing from beginner investors who are looking to start their journey. We’ve compiled a list of FAQs for you to brush up on so you can become a stock market pro.
Why should I buy stocks?
- Owning stock means owning a piece of a company.
- Invested funds are working for you 24/7.
- Invested money can grow much faster than cash in a savings account.
Ever wanted to own part of a great business? That’s exactly what happens when you purchase stock. You’re buying a part of that company. As a part-owner, you’re entitled to a share of the profits and assets of that business.
You profit from owning stock in one of two ways.
- The company can decide to return money to its shareholders via dividends. This is cash that is paid to you on a regular basis for being a shareholder.
- The business grows and the price per share increases. Once you decide to sell your shares, you pocket the returns.
While money kept in a savings account gets eaten away by inflation, invested money is working for you 24/7. Unlike a bank account, your original outlay can multiply many times over if you invest in the right companies.
On average, the stock market has returned around 10% annually since 1974 (without factoring in inflation). That easily beats the 0.5% you’ll get by keeping your money in a savings account.
What is a stock?
- A stock is a piece of ownership in a company.
- In the short-term, share price changes based on the fickle opinion of the masses.
- In the long-term, a company’s true value is reflected in its share price.
More than just a slip of paper (or a computer record these days), a stock is a stake in a living, breathing business in which you share the rewards and the risks alike.
In order to raise capital, companies issue stocks for sale to the general public, which are then traded as the value rises and falls. Stocks are traded on various exchanges all around the world, the largest being the New York Stock Exchange (NYSE).
In the short term, a share price moves based on the opinion of the crowd: those people looking to buy or sell. When there are more people looking to buy, up the price goes. This is usually fickle because the news of the day influences what the world thinks about certain stocks.
Over the long term, however, a company’s true value is reflected in its price, that’s why time – more than anything else – is the critical ingredient of successful investing.
As part-owner, you are entitled to a share of that company’s profits and assets. You also have a say in how that business is run. How much of those profits you have a claim to and how much influence you have depends on the number of stocks you own relative to the total number of shares issued.
Stocks are the backbone of a good investment portfolio and have proven to outperform every other form of investment in the long run.
How are public companies identified?
- A ticker symbol is a 3, 4 or 5 letter abbreviation that easily identifies every public company.
- Stocks traded on the NYSE have symbols with up to 3 letters, like MA (Mastercard).
- Stocks traded on the NASDAQ have symbols with 4 letters, like MSFT (Microsoft).
A ticker, or stock symbol, is a unique 3, 4 or 5 letter abbreviation assigned to every public company for identification purposes. All tickers use only capital letters.
Think of tickers as nicknames. Sometimes, they can be exactly the same as the brand name – like IBM (NYSE:IBM).
Stocks traded on the New York Stock Exchange have symbols with up to three letters – like T (AT&T), DO (Diamond Offshore Drilling) and LUV (Southwest Airlines).
Stocks traded on the NASDAQ usually have four-letter symbols – like MSFT (Microsoft).
If you see a five-letter ticker symbol that ends with the letter X, that is how you can automatically recognize a mutual fund – like UUPIX (for Profunds UltraEmerging Markets). Beware that mutual funds don’t actually trade on any exchange the way stocks do, though.
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How does compound interest work?
- Compound interest is when the money you earn starts earning money.
- Compounding is the easiest way to become wealthy.
- The sooner you begin investing, the more time your earnings have to compound.
Compound interest is an investor’s best friend. Compounding is simply when the money you earn starts earning money. This means your stash is growing faster than if you were simply adding a lump sum every month.
So many people say “I can’t afford to start investing.” The truth is, you can’t afford not to start investing, because time is the issue here, not money. Compound interest is the real silver bullet when it comes to growing your wealth and the earlier you start, the more powerful it becomes.
A certificate of deposit (CD) or a government bond over time might give you 5% per year. A 10% annual return is the historical average for the stock market. And 15% is what you could get if you learn how to pick your own stocks and take advantage of the skills MyWallSt teaches.
The majority of people subscribe to some form of online entertainment service like Spotify (NYSE:SPOT) Premium or Netflix (NASDAQ:NFLX) – a lot subscribe to both. The $18 leaves our bank accounts every month and we hardly even notice.
Let’s say at 18 years old, you subscribe to both services and remain a loyal customer for the next 50 years. You’ll end up retiring $10,800 down. “Small price to pay for being able to binge-watch Breaking Bad,” I hear you say.
Had you stuck that $18 into a savings account instead you’d have that $10,800 when it comes to retiring, plus some interest. Of course, inflation will have eaten up a huge chunk of that, so it’s hardly worth giving up the comfort and convenience of your subscription accounts.
Had you invested that money, after year one, on average, you’re up 10% on your original investment. The year after, you make interest on your interest and so on. It’s like adding successive layers to a cake with each a little larger than the last.
So if you’d consistently invested that money, after 50 years it would be worth over $300,000.
How much money should I keep in a savings account and how much should I invest?
- If you need money in the next year, it should be in cash.
- Any money that you don’t need in the next year should be invested.
- You should invest with a 5-10 year timeline in mind.
When choosing how much money to invest in the stock market, it’s important to consider how long it will be before you need that cash.
Here are two rules of thumb to follow when deciding the smartest, safest and most profitable place for your savings.
“If you need your money in the next year, it should be in cash.”
The stock market can fluctuate greatly. It’s no fun to need cash for, say, a down payment on your first home and find that your stocks are down 50%. If you’re house shopping, wedding planning or car buying within the next year, keep those necessary funds in a savings or money market account (double-check that it’s FDIC-insured too.)
“Any money you don’t need within the next year is a candidate for the stock market.”
This is where the fun begins. And it’s why we encourage you to get saving now! Any cash you don’t need in the coming year can go to work for you every day in the stock market… taking bigger risks and affording you larger profits.
When you invest with funds that you have no immediate need for, you protect yourself from the short term fluctuations of the stock market. Over the course of a year or two, you could see your investment suffer a loss, but on a longer timeline, the stock market and great companies get bigger and more profitable. That’s why you should invest with a 5-10 year timeline in mind. This will prevent you from pulling your funds out in a downturn and incurring a loss.
What does beating the market mean?
- The Standard & Poor’s 500 is a selection of 500 stocks that represent the entire stock market.
- When people talk about “beating the market,” the market is the S&P 500.
- If the S&P 500 goes up 10% and your portfolio goes up 13%, you beat the market by 3%.
What is the S&P 500?
Turn on any financial television network and you’ll almost certainly hear someone mention “The S&P” within 5 minutes. You’ll also hear professional investors talk about “beating the market.”
So what are they talking about?
The S&P 500, or Standard & Poor’s 500, is a selection (aka index) of 500 stocks that are a microcosm of the entire stock market. It is the most commonly followed index and is considered a good indicator of the health of the U.S. economy. It’s been around since 1923, but the 500 companies have changed since then.
You’ll often hear people talking about “beating the market.” “The market” in this case means the S&P 500. For example, if the S&P rose 13% in one year, but your stock portfolio went up 17% that same year, you beat the market by 4%. Good job!
Beating the market is seen as the holy grail of stock investing. There are plenty of other indexes that track various sections of the stock market both in the States and worldwide. The Dow Jones Industrial Average is similar to the S&P 500 except it focusses on 30 companies. The FTSE 100 tracks the UK stock market, while the Nikkei 250 tracks Japan.
There are indexes for specific industries and even very specialized indexes to track things like “ethical companies.”
Check out the best investing blogs we use here at MyWallSt to keep our fingers on the pulse of the stock market.
What’s market cap and why does it matter?
- To determine the size of a company, look at “market capitalization” (market cap, for short).
- Market Cap = Number of shares outstanding multiplied by share price.
- Market cap sizes range from nano, micro, small, mid, large and mega.
New investors often fall into the trap of equating share price with value. In reality, the two are completely independent of each other. The share price is actually of very little consequence. As we will see later with stock splits, a company’s share price is dependent on how many shares are in the market at any given time.
Let’s take the example of McDonald’s (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG). A stock in Chipotle currently costs around five times that of McDonald’s. So which is the bigger company?
Chipotle is a great company that has been expanding rapidly, but it’s nowhere near competing at McDonalds’ level just yet. To get the figures, we look at the market capitalization of each company.
Chipotle is currently valued at around $22 billion. McDonald’s, on the other hand, has a market cap of over $150 billion.
So what does this mean for investors? Shouldn’t you just invest in the most valuable companies?
It all depends on what your goal is as an investor. The more valuable companies are much safer investments. Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Disney (NYSE:DIS) aren’t going anywhere anytime soon. You’re pretty much guaranteed that you won’t lose all your money on these guys.
The flip side is that these companies aren’t going to grow as fast as smaller companies like Chipotle or iRobot (NASDAQ:IRBT). These companies have more room to expand and therefore could see huge rises over the next few years. Of course, that also makes them riskier investments.
So you’re making a trade-off between risk and reward. The more volatile a company, the greater the potential for growth. The more secure a company, the less the chance of quadrupling your money.
There are six levels of market capitalization:
- Mega Cap (least risk/slowest growth): $200 billion and greater
- Large Cap: $10-$200 billion
- Mid Cap: $2 billion to $10 billion
- Small Cap: $300 million to $2 billion
- Micro Cap: $50 million to $300 million
- Nano Cap (most risk/fastest growth): Under $50 million
Do I need a broker to start investing?
- You need a broker to buy and sell shares on your behalf.
- A brokerage account is like a bank account for investing.
- Discount brokers provide cheap trading, but without the advice.
So you’ve decided to become an investor, but how do you go about actually buying shares? Actually, legally, you can’t.
Shares can only be purchased by a licensed professional called a stockbroker. These are licensed and accredited professionals who ensure that trades are conducted with all the necessary legal and regulatory procedures. A stockbroker will buy and sell shares on your behalf in exchange for a fee.
Stockbrokers, therefore, act as a middleman between investors and the market. Much like if you’re feeling unwell, a doctor provides you a prescription, and the pharmacist fulfills that prescription. This is essentially the function of the stockbroker.
In the past, stockbrokers charged high fees and usually insisted on minimum deposits that were outside the realm of the average worker. These days, the internet has given birth to discount brokers that compete on pricing and usually have no minimum deposit restrictions. This has opened up investing to the masses.
However, it comes with a downside.
Brokers in the past also provided advice as part of their fee. Discount brokers provide no such service, which means that investing is very much a do-it-yourself endeavor.
That’s where MyWallSt comes in. We want to help educate and guide users throughout their investing life, giving them the tools to invest with confidence. However, the fact remains, you still need to engage a broker in order to buy and sell shares.
How do I set up a brokerage account?
- There are some regulatory requirements in setting up an account
- In order to set up a brokerage account, you will need to provide some basic information and answer some questions about your finances.
- International investors may need to do some research into their own tax situation.
Setting up a brokerage account is similar to setting up a bank account. However, the world of investing is a highly regulated one and brokers are required to gather a little more information than a bank.
Before you begin, you may want to do some research on what kind of brokerage you want. Brokers differentiate themselves by offering different fee structures or services. Some will allow you to invest in foreign companies, some will only permit you to invest in U.S. listed companies. Some will allow you to set up certain tax-efficient accounts like Roth IRAs.
We have a close and deeply integrated relationship with the broker DriveWealth and recommend them to our users. However, the decision is yours.
In order to set up an account, you will need certain personal information like your name, address, and date of birth. Following this, you will be required to answer some simple questions regarding your employment status, income level, and investing experience.
While some people may find these questions slightly intrusive, it’s an important element of the brokerage setup process. Brokers are required by law to “know their customer”, meaning they have to ensure that the products and services being offered are suitable to you.
Finally, you’ll be asked to provide some documentation in order to prove who you are. This will vary depending on where you live. A U.S. user might only be required to provide their social security number. An international user might be required to provide a photo of government-issued ID and proof of address.
International investors must also complete a separate form called the W-8BEN, which is used to calculate what tax if any, you will have to pay in the U.S. on your gains. Many countries have a tax treaty with the US when it comes to this, but you should take the time to research your own situation.
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How do I buy my first stock?
- Your first investment should be a company that you are interested in.
- You don’t need to put all your money in right away.
- Keeping an investment journal is a great way to learn as you go.
Now that your broker account is set up and funded, you’re all ready to buy your first share.
This is where a lot of novice investors get stuck.
On many occasions we have users contact us saying they can’t decide on what stocks to start off with, concerned that they don’t know enough or that they’ll lose money.
The important thing to remember here is that investing is a life-long pursuit. Your first stock doesn’t have to be the perfect investment, backed by hundreds of hours of in-depth research.
Getting started is what’s most important here.
If you’re not feeling confident, invest a small amount (nothing that is going to hurt you financially) in a company that interests you. As previously mentioned, Bedrock stocks like Apple and Google are safer investments than small-cap companies.
Owning shares in a company will foster your interest in that company. Suddenly, you’ll find yourself reading up more on the business, getting to know the managers, and understanding how it works.
A great tip is to start an investment journal with your very first purchase.
Simply write down the date of your purchase along with any thoughts that led you to this decision. For example, you may like the CEO and believe in his long-term vision for the company. Obviously, this means you’re going to have to read up on the CEO and find out what that vision is. This is an important part of the learning process. If you haven’t got any reasons to buy the shares, then obviously this isn’t the right stock for you.
You’ll find these notes incredibly helpful further down the line. You’ll be able to revisit the first stages of your investment thesis and examine what you got right, and possibly what you got wrong.
What do I do after I buy a stock?
- Don’t worry about checking the stock price every day.
- Keep tabs on how the company is performing via the news and company press releases.
- Read the companies quarterly reports to get a better insight into the business.
Now that you’ve bought your first stock, you’re officially an investor. Congratulations!
Hopefully, this will be the first step in a long and profitable journey for you.
Now you need to start monitoring your investment to see how it’s performing. In our MyWallSt app, your stock will be automatically added to your portfolio so you can track its performance. However, checking the stock price every day isn’t really helpful.
It’s a far better use of your time to keep tabs on how the business is performing. In the MyWallSt app, you’ll find daily updates about the businesses we recommend written in-house by our analysts. This is a great place to start.
Most companies will also send out press releases regarding any important news about the business. You can subscribe to these updates on the investor relations section of their corporate websites.
Finally, you should find out when the company is set to send out its quarterly earnings release. Every public company in the U.S. publishes one of these every 3 months. In it, management will give a summary of what’s occurred over the previous quarter. Some also give insights into their future plans, and possibly even how much they expect to earn in the coming year.
Following these steps will have you set up to become an informed and successful investor in no time. Once you get into the swing of things, you can simply repeat the process to build a diversified portfolio of great companies.
Good luck on your investing journey. We look forward to being with you every step of the way.
All of these questions and answers are excerpts from our Learn App, which you can download in the app store or view on desktop right here. There’s even an audio function so you can listen to each lesson on the go.