Stock Basics: Part I
The thought of investing in stocks can make people's eyes glaze over.
Given the power of investing, and how you can make your money grow though investing in stocks, it's puzzling why people wouldn't want to know more about how to "do that.
" Again, the problem lies in lack of financial education.
Perhaps if more people were educated about the basics of stocks and bonds, the stock market, options, and other "building blocks" of investing, we may very well have been able to avoid, or at least reduce the effects of, this recession.
If you feel bewildered by stocks, and investing in general, then allow this article to help patch that void for you, by filling it with some basic financial education.
Stocks What people generally refer to as "stocks" are actual, physical pieces of paper that represent ownership in a company.
They come into existence when a company, in a effort to raise money, sells pieces of itself for anyone to buy.
There's a lot that goes into determining the price of the stock which I won't get into here, but suffice it to say that it's far from arbitrary.
When a company first goes public with its stock, this is called an IPO, or Initial Public Offering.
Stock Exchanges and the DJIA As stocks are bought and sold, they are said to be "traded.
" Stocks are traded on exchanges, which are basically just big marketplaces where people buy and sell stocks.
The two main stock exchanges in the United States are the NYSE (New York Stock Exchange) and the NASDAQ (National Association of Securities Dealers Automated Quotations).
Although "Nasdaq" is an acronym, the Nasdaq itself has claimed that the acronym is obsolete.
When referring to the NYSE, you might occasionally hear someone refer to it by its full name, but you will never hear someone refer to the Nasdaq anymore by its full name.
Again, exchanges are nothing more than marketplaces where stocks are traded (among other things).
Just picture them like you'd picture Costco and Target, except instead of selling tolietries and food, they sell stocks.
The DJIA, or Dow Jones Industrial Average, created by the Wall Street Journal in 1896, is not a marketplace.
Rather, it's a collection of stocks that aims to be representative of the NYSE.
The value of the DJIA is actually just an average of the total of all its stock prices.
It has become iconic as an indicator of all stock markets and the economy, even though this is a misnomer (the economy is made up of many more components than simply the NYSE).
Still, investors use it as a general benchmark for the overall performance of all stocks on a given day.
Stock Quote You can find the quote of a company's stock very easily today, either through finance websites like TheStreet.
com, Yahoo Finance, MSN Money, and others, or on TV news.
For example, CNBC usually displays a "ticker" across the bottom during the hours the stock markets are open (generally from 9:30 am to 4 pm, EST) showing the current status of different stocks that are being traded.
The stock quote itself is generally made up three parts:
In this case, MCD is the stock symbol for McDonald's.
The second value is the current price of one share of stock.
In this example, buying one share of McDonald's stock costs $75.
82.
The last value is the change in the stock's price since the beginning of the day.
Here, we can see the stock price went up $0.
87.
What this means is that if you bought one share of McDonald's in the morning, by the end of the day, you would have made $0.
87.
Because this quote was taken at the end of the day, that means the stock price when the market opened was $74.
95.
Using 6th grade math, we can determine that the stock gained 1.
16% on that day alone.
I say "6th grade math" to show that figuring out stocks doesn't require a college degree in economics to understand.
But, just as a refresher, the math worked like this: ($0.
87 x 100) / $74.
95 = 1.
16% From a word problem perspective, another way to determine this is to ask "$0.
87 is what percent of $74.
95?": "is" / "of" = X / 100 I'm emphasizing percentages here because, too often, beginning investors get carried away with the number of "points" - Wall Street gibberish for dollars - a stock has gone up or down.
But what really determines whether or not an investment is good is the percentage gain or loss.
In another article, I will discuss the main different types of investment goals, but for now, the size of the percentage gain is either good or bad depending on each person's goals.
One thing all investors agree on though -- movement up is better than nothing! Basic Investment Strategies The goal of any stock investment strategy is to grow your money.
There are two main schools of thought when it comes to investing:
The idea is that, by tracking a company's actions, you can get a sense of how well (or not) a company is doing and how well its future actions will do.
This would therefore determine whether or not you buy stock in that company.
Technicalists, or "chartists," think differently in that they believe past performance and trends determine a stock's movement.
Usually math whizzes or economics majors (or both), they live in the charts, analyzing trends, stock movements, averages, distributions, and a host of other mathematical indicators to determine how a stock will perform, primarily based on how it has already performed.
In recent years, there have been hundreds of strategies created from combining the two schools of thought, all in an effort to predict how much and where each stock is going to move and end up.
I personally fall in between the two schools - I think the more information you have, the better - but that's of no consequence.
The point here is just to show you what is out there so that you're aware.
A very famous and revered Wall Street investor named Peter Lynch coined the phrase, "Invest in what you know.
" That rule of thumb has proven invaluable to many investors, despite its ignorance of the wealth of information available.
Using this strategy, the idea is that by investing in companies you know and trust, there's a good chance you will make money from those investments.
Bulls vs.
Bears What's the difference? Very simple.
Bullish people think the stock market's going up, and bearish people think the stock market's going down.
Said another way, bullish views are optimistic, while bearish views ar pessimistic.
An easy mnemonic to remember this is to think that it takes a bull a long time to run up a hill, but the bear goes right out the window.
This was created from the tendency of the stock market to slowly climb when things are good, and fall very quickly when they are not.
Review This may seem like a lot of information, but knowing about the stock market is actually very simple.
There are really only a few basics, and the rest are variants from that.
To review:
" Thanks for reading and keeping checking back for Part II!
Given the power of investing, and how you can make your money grow though investing in stocks, it's puzzling why people wouldn't want to know more about how to "do that.
" Again, the problem lies in lack of financial education.
Perhaps if more people were educated about the basics of stocks and bonds, the stock market, options, and other "building blocks" of investing, we may very well have been able to avoid, or at least reduce the effects of, this recession.
If you feel bewildered by stocks, and investing in general, then allow this article to help patch that void for you, by filling it with some basic financial education.
Stocks What people generally refer to as "stocks" are actual, physical pieces of paper that represent ownership in a company.
They come into existence when a company, in a effort to raise money, sells pieces of itself for anyone to buy.
There's a lot that goes into determining the price of the stock which I won't get into here, but suffice it to say that it's far from arbitrary.
When a company first goes public with its stock, this is called an IPO, or Initial Public Offering.
Stock Exchanges and the DJIA As stocks are bought and sold, they are said to be "traded.
" Stocks are traded on exchanges, which are basically just big marketplaces where people buy and sell stocks.
The two main stock exchanges in the United States are the NYSE (New York Stock Exchange) and the NASDAQ (National Association of Securities Dealers Automated Quotations).
Although "Nasdaq" is an acronym, the Nasdaq itself has claimed that the acronym is obsolete.
When referring to the NYSE, you might occasionally hear someone refer to it by its full name, but you will never hear someone refer to the Nasdaq anymore by its full name.
Again, exchanges are nothing more than marketplaces where stocks are traded (among other things).
Just picture them like you'd picture Costco and Target, except instead of selling tolietries and food, they sell stocks.
The DJIA, or Dow Jones Industrial Average, created by the Wall Street Journal in 1896, is not a marketplace.
Rather, it's a collection of stocks that aims to be representative of the NYSE.
The value of the DJIA is actually just an average of the total of all its stock prices.
It has become iconic as an indicator of all stock markets and the economy, even though this is a misnomer (the economy is made up of many more components than simply the NYSE).
Still, investors use it as a general benchmark for the overall performance of all stocks on a given day.
Stock Quote You can find the quote of a company's stock very easily today, either through finance websites like TheStreet.
com, Yahoo Finance, MSN Money, and others, or on TV news.
For example, CNBC usually displays a "ticker" across the bottom during the hours the stock markets are open (generally from 9:30 am to 4 pm, EST) showing the current status of different stocks that are being traded.
The stock quote itself is generally made up three parts:
- Symbol
- Price
- Change
In this case, MCD is the stock symbol for McDonald's.
The second value is the current price of one share of stock.
In this example, buying one share of McDonald's stock costs $75.
82.
The last value is the change in the stock's price since the beginning of the day.
Here, we can see the stock price went up $0.
87.
What this means is that if you bought one share of McDonald's in the morning, by the end of the day, you would have made $0.
87.
Because this quote was taken at the end of the day, that means the stock price when the market opened was $74.
95.
Using 6th grade math, we can determine that the stock gained 1.
16% on that day alone.
I say "6th grade math" to show that figuring out stocks doesn't require a college degree in economics to understand.
But, just as a refresher, the math worked like this: ($0.
87 x 100) / $74.
95 = 1.
16% From a word problem perspective, another way to determine this is to ask "$0.
87 is what percent of $74.
95?": "is" / "of" = X / 100 I'm emphasizing percentages here because, too often, beginning investors get carried away with the number of "points" - Wall Street gibberish for dollars - a stock has gone up or down.
But what really determines whether or not an investment is good is the percentage gain or loss.
In another article, I will discuss the main different types of investment goals, but for now, the size of the percentage gain is either good or bad depending on each person's goals.
One thing all investors agree on though -- movement up is better than nothing! Basic Investment Strategies The goal of any stock investment strategy is to grow your money.
There are two main schools of thought when it comes to investing:
- Fundamental
- Technical
The idea is that, by tracking a company's actions, you can get a sense of how well (or not) a company is doing and how well its future actions will do.
This would therefore determine whether or not you buy stock in that company.
Technicalists, or "chartists," think differently in that they believe past performance and trends determine a stock's movement.
Usually math whizzes or economics majors (or both), they live in the charts, analyzing trends, stock movements, averages, distributions, and a host of other mathematical indicators to determine how a stock will perform, primarily based on how it has already performed.
In recent years, there have been hundreds of strategies created from combining the two schools of thought, all in an effort to predict how much and where each stock is going to move and end up.
I personally fall in between the two schools - I think the more information you have, the better - but that's of no consequence.
The point here is just to show you what is out there so that you're aware.
A very famous and revered Wall Street investor named Peter Lynch coined the phrase, "Invest in what you know.
" That rule of thumb has proven invaluable to many investors, despite its ignorance of the wealth of information available.
Using this strategy, the idea is that by investing in companies you know and trust, there's a good chance you will make money from those investments.
Bulls vs.
Bears What's the difference? Very simple.
Bullish people think the stock market's going up, and bearish people think the stock market's going down.
Said another way, bullish views are optimistic, while bearish views ar pessimistic.
An easy mnemonic to remember this is to think that it takes a bull a long time to run up a hill, but the bear goes right out the window.
This was created from the tendency of the stock market to slowly climb when things are good, and fall very quickly when they are not.
Review This may seem like a lot of information, but knowing about the stock market is actually very simple.
There are really only a few basics, and the rest are variants from that.
To review:
- Stocks - pieces of paper that represent ownership in a particular company
- Stock exchanges - places where stocks are bought and sold ("traded"), NYSE and NASDAQ being the most popular
- DJIA - Dow Jones Industrial Average (or simply "the Dow Jones"), price-weighted average of a specific collection of NYSE stocks
- Stock Quote - snapshot of the status of a stock.
Percentage gain or loss shows the real value of the investment. - Basic Investment Strategies - fundamentalists, chartists, and rule-of-thumb ("invest in what you know")
- Bulls vs.
Bears - Optimism vs.
Pessimism; Going up vs.
going down.
" Thanks for reading and keeping checking back for Part II!
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