This blog is the first installment of a new Stocks for the Week series called The Beginvestor, catered specifically for people who are new to the investing world and want to understand the ins and outs of the market. The Beginvestor is written by Danielle Bilbruck, a novice investor herself, who will be covering her own investing education in detail as she goes and documenting it for this series.
As a professional writer, my personal belief is that one doesn’t need to have expansive knowledge of the subject on which they are writing so much as they need top-notch research skills. If you can do quality, in-depth research, you can write about pretty much anything.
When I started writing blogs on personal finance and stock market news, I didn’t have much of a handle on what exactly happened inside of the stock market in general. From the outside looking in, it felt like the market was this almost imaginary concept I had only seen in movies: in a room somewhere, in a magical world called Wall Street, there were lots of people yelling into phones about buying and selling while numbers increased or decreased, making money for some while crushing the dreams of others, and who even really knew why, anyway? Having been in the business world for 15+ years, I know business well; I know why stock prices rise and fall, and I understand supply and demand as well as I can as an amateur. My favorite writing topic when it comes to investing is new acquisitions and mergers: who’s buying what, and what’s going to happen next? But after several months pontificating over whose stock I thought would rise or fall based on recent business decisions, I started thinking, Why not me? I have a feeling I’m not the only one.
I wanted to start getting focused on how I would begin investing, and this particular series was born: why not bring others along for the ride? But, in an effort to make the best decisions and not simply shoot in the dark, I need to know more about what the investing world looks like. I’ll be examining the basics about investing, to include terms we should be familiar with, basic guidelines, and different tools to help with the investing process, like robo-investors or our Stocks for the Week Investor app, designed to take the guesswork out of whether or not an investment is safe or risky.
To begin, there is a lot of vernacular associated with investing, and it can seem a little daunting if you don’t know what any of it means. Investing shouldn’t just be for those with backgrounds in economics or Wall Street employees or wealthy business owners…it should be for the rest of us, too! Here, let’s break down a quick-and-dirty glossary of some of the terms we’ll encounter on our “Beginvesting” journey:
Blue Chip Stock: A blue chip stock is stock you can buy in a business that has an excellent reputation in being dependable and profitable, and also has an established history behind it. Think of these as “safe bet” stocks because the companies are consistent and do well for themselves.
Bond: You may have heard of bonds in the past. I know my grandmother bought bonds for my brother and I as children, with hopes that they would pay off a profit in the future for us. When you purchase a bond, it’s like you’re loaning the bank (or the entity giving you the bond) money, and they’re telling you that they will pay it off entirely (or give you the amount you paid for it) on a future date, called the “maturity date.” They will also pay interest based on a “coupon rate.” There are all types of bonds in terms of quality, from AAA-rated bonds (the highest-rated), and junk bonds (the lowest.)
Diversify/Diversification: When someone “diversifies” their portfolio, it simply means that they buy a range of stock in a variety of different industries or companies. Perhaps they “diversify” by investing in both inexpensive and expensive stocks, or in the tech sector, but also the oil and gas sector. The whole point to diversifying is to mitigate risk: if one industry does poorly and all your stocks are tied up in that industry, you could lose it all. If you diversify, you still can hopefully count on the other stocks you have.
Dividends: Dividends are profits paid out to investors or shareholders by the company they’ve invested in. Typically, these profits are paid out quarterly or annually, and the amount depends on how well the company has done.
Dow Jones: The Dow Jones is a stock market index, much like NASDAQ and Standard & Poors (S&P). According to The Balance, a market index “provides a summary of the overall market by tracking some of the top stocks within that market.” The Dow Jones is the oldest and most well-known of all market indexes, and tracks the 30 largest companies in the US.
Forex: The Forex stands for “foreign exchange” and is a market that revolves around investing in and trading currency. When you buy currency in another country, you’re hoping that you can turn it around for a profit based on the exchange rate between countries. It is the largest market worldwide.
Going Long: When you “go long,” it means that you buy stocks or bonds with the hope or expectation that their value will increase as time goes on.
Going Short: When you “go short,” it means that you are selling your stocks or bonds because you think their value is going to soon decrease.
Mutual Fund: According to Top Ten Reviews, a mutual fund is “a type of investment that combines a pool of funds from multiple investors to invest in a wide range of securities, such as stocks, bonds or money market funds.” You can buy in, along with many other people, to a mutual fund, which is then managed by a professional financial advisor. These are not known, however, for their predictability.
NASDAQ: The NASDAQ is both a market index, like the Dow Jones, as well as an actual marketplace, like the NYSE, where people can buy stocks. The NASDAQ Composite is the index that tracks the 3,000 companies traded on the NASDAQ exchange, which tend to be tech companies, but also are comprised of airlines, banks, and retail.
NYSE: The NYSE stands for New York Stock Exchange, and is the most well-known stock marketplace: a place where you can buy stocks. Approximately 1.4B shares are traded on the NYSE every day, and it tracks roughly 2,800 companies to NASDAQ’s roughly 3,000. Stocks traded on the NYSE range from high-growth companies to blue chip stocks.
Penny Stock: Unlike a blue chip stock, penny stocks are stocks purchased in companies with little to no real reputation, track record, or background. They’re called “penny stocks” because they are very inexpensive and can often be bought for literal pennies.
Portfolio: Your portfolio is simply a collection of all the stocks and investments that you own.
S&P: S&P is the short name for Standard & Poors, which is a market index similar to the Dow Jones and NASDAQ. The S&P tracks only 500 companies nationwide, but these shares make up nearly 70% of all stocks that are publicly traded every day.
Security: To have a security simply means that you own stocks, bonds, or options in a particular company.
Stock: A company’s stock is the capital it can raise from people buying stocks or shares. When you buy stocks, you are buying shares in a company that you can either trade or profit on.
Yield: The yield on a stock is “the percentage of dividend over the stock price.” It amounts to the profit or loss received in owning the stock.
Now that we have some basic vernacular under our belts, it will be easier to start the investing process, knowing what the words we are reading actually mean. Follow along on our “Beginvesting” track as we next navigate the basics of buying stock.