When it comes to investing it can be hard to know where to begin. Don’t worry if you’re confused. Every investor starts off as a beginner.
In this article, we dive into some basic questions and answers about how to get started investing in stocks.
Let’s get started.
What are stocks?
A stock, or share, is a fraction of ownership in a company, and its price generally rises and falls based on how well the company is doing. What causes a stock to rise or fall can depend on many factors. A company may report positive or negative earnings. There may be political factors, such as tariffs or foreign wars. The state of the economy also often matters.
The point is: Stocks go up and down. It’s the nature of the market.
Companies that issue shares of stock to everyday investors are called “publicly traded,” or simply “public,” which means they are listed on a stock exchange, and their stock is available for anyone to buy. The most famous stock exchange in the U.S. is the New York Stock Exchange (NYSE). When people talk about Wall Street, that’s generally what they mean, since the NYSE is literally a building on Wall Street.
What exactly does it mean to buy shares of a company?
Good question! One of the most repeated phrases in investing is that when you buy stock, you are buying a piece—a “share”—of that company. That doesn’t mean a literal piece, of course, although in past you actually did get a printed, signed stock certificate with a seal of authenticity.
These days, stock shares usually amount to little more than numbers on a screen, but they represent a percentage of ownership in the business.
Ideally, this partial ownership—this piece of a company—increases in value as profits and the value of the company increase. (The value of stocks can always go down, too.) Issuing stock is one of the ways that public companies raise money.
Depending on the type of shares you own, you may have some voting power at the company’s annual stockholder meetings. That means you can vote on such things as who sits on the board of directors, and perhaps some of the decisions the company will make in the coming year.
But when you consider that most companies issue tens of millions of shares of stock (and keep much of it for themselves), the amount you actually own, and any “power” that might come with it, is likely a drop in the pond.
Note: There is also something called fractional shares, which as their name implies, allow you to buy fractions of shares in companies. Why? The price of even a single share of stock for some companies can be hundreds, or even thousands of dollars. Purchasing fractional shares can help you start investing with just a little bit of money, rather than paying the full price for whole shares.
How much do shares of a stock cost?
Share prices of different companies can vary dramatically. A single share of the latest hot tech company might cost a couple hundred dollars or even several thousand dollars, for instance.
You might even find that companies in the same industry—automobile manufacturing, for example—might have vastly different stock prices. One company might sell shares for a few dollars, while another might offer them for several hundred dollars. What gives? It’s true that stock prices are constantly changing, but there is also a lot of math involved.
Different companies have a different number of total shares that they sell to the public, at different prices, based on their overall valuation, or how much the company is worth, as well as supply and demand for their shares, the company’s earnings, and other financial measurements. The thing to keep in mind as a new investor is that a high share price does not mean that a particular stock is “better” than one with a lower price (or vice versa).
Sometimes it just means that the stock is in high demand and people are willing to pay a lot for it based on the idea that it will be worth more in the future. Nor do you necessarily have to buy an entire share of a company to invest in it.
Is investing risky?
The Securities and Exchange Commission (SEC) is the federal government agency responsible for protecting investors, by making sure that stock buying and selling is orderly and transparent. But that does not mean that your money is protected by default.
All investing involves risk. Keep in mind that stock prices, even those of very profitable and well-known companies, can go down, and often do go down, for various reasons, especially in the short-term.
That said, the fact that a stock price is down on any particular day doesn’t mean it will stay that way either.
You have to choose your own risk profile. That means determining how much risk you’re willing to take on as an investor. Again, this may depend on your time horizon. If you’ve got 30 years to weather market storms until you retire, you may want to consider being more aggressive. If you’ve only got ten years until retirement, you may want to be more conservative.
How should a person invest?
There’s no one way to invest. And no one can tell you the exact right way to invest so that you make money year over year. Any person who tells you they can guarantee results is likely to be leading you down a garden path.
However, many wise investors (including us here at Stash) recommend a long term strategy. What does that mean? In general, it means buying and holding your investments for the long term, rather than trying to time the market.
People who try to time the market are looking to make money based on daily, weekly, or even monthly fluctuations in share price. That kind of kind of trading is best left to more seasoned investors. But if you’re new to investing—it’s probably not a good idea.
Who should invest in stocks?
It’s not about who should be investing in stocks or how many stocks you should own—it’s about your time horizon and your risk profile.
When you’re young and have a long time horizon for your investments, you have plenty of time to weather any dips in the market.
Remember, over the long term, the stock market will always have its ups and downs. The 2008 stock market crash and the ensuing bear market are still fresh in many investors’ minds. That event may have even made some millennials wary of investing in the stock market altogether.
But the reality is, by 2012 the market had regained its previous levels, and it made new all-time highs as recently as October 2018.
So a question you may want to ask yourself is what kind of stocks do you want to invest in and fit your risk profile.
Let’s talk growth stocks vs. value stocks
Growth stocks generally increase at an above average growth rate. They’re issued by companies that tend to be getting a lot of attention and media buzz, and that are usually posting impressive earnings.
The enthusiasm around these stocks can translate into increased demand. And increased demand can mean higher share prices. This makes them more profitable for investors with these stocks in their portfolios. They’re seeing fast “growth.”
Growth stocks gain market momentum for a number of reasons, but typically, it’s because the underlying companies are doing something new and exciting, or have some sort of market advantage.
This could include a company on the verge of a clean energy breakthrough, or one that’s about to introduce a new cancer treatment. A company that’s disrupting the way we get our groceries or send photos and videos to friends instantly, may also be considered growth stocks.
It’s important to note that growth stocks may be more volatile in the short run than value stocks. That means that their performance may be less predictable. If you’re excited about growth stocks, you can still balance out your risk level out with value stocks and bonds.
Value stocks are stocks that may be trading at a bargain price; they are a value, in other words, relative to other stocks, although that does not necessarily mean they’ll be cheap.
You can think of it as getting a discounted stock, or buying shares at a good price. This means that you would think the stock is actually worth more than you’re paying for it, or that it’s undervalued.
Sometimes, a value stock is from a well-known company that has fallen out of favor with investors. It’s a company that may be overlooked by investors in the markets, despite having a relatively strong performance otherwise.
Other times, it could be the stock of a company that has been producing solid returns for years, while not attracting a lot of attention.
Generally, you’d buy a value stock with the expectation that its price will increase — though not as aggressively as a growth stock.
How can you identify a growth or value stock?
Growth and value stocks have specific attributes that include things such as the value of the stock relative to other companies in the same market. That’s something called the price-earnings ratio (P/E ratio), which is a formula that looks at the value of the stock relative to the company’s earnings.
But one simple way to think of it is that value stocks tend to fly under the radar, while growth stocks can be considered the current market rockstars.
Growth stocks are like Taylor Swift, and value stocks are Stevie Nicks, to put it another way. Swift is a fairly recent superstar, with a proven track record of hits over her relatively short career. Nicks, likewise, is a proven star. But her success has been sustained over decades—and she can still draw thousands of fans, despite not attracting as much recent attention.
At a very basic level, value stocks have low share prices in relation to corporate performance. If a company has a track record of growing sales, increasing earnings, and positive cash flow, it’s probably going to be an attractive investment.
If it checks all of those boxes and its share price is still relatively cheap? It might fit the bill as a value stock.
In order to keep your holdings diversified, it could be a good idea to have a mix of companies that are solid bets and available bargains while including new, dynamic companies with high potential.
For budding investors, compiling a portfolio with a variety of both value and growth stocks is usually the less risky path forward.
Small-cap, mid-cap, large-cap, what’s the difference?
There’s another way to think about stocks when you begin investing. Typically the investment world categorizes companies as small-cap, large-cap, and mid-cap stocks. These names apply to the size of the companies issuing stocks.
Small-cap companies generally have a market cap between $250 million and $2 billion.
Mid-caps have a value between $2 billion and $10 billion.
Large-cap companies are typically valued at $10 billion or more.
Small-cap and mid-cap stocks tend to be riskier, because they are smaller. Think about it—unlike large companies, which are usually older and have relatively more stable sales, smaller companies may be newer, with less certain revenues. But small-cap and mid-cap stocks might also have greater potential for growth. They may be in a new or hot industry that’s poised for growth, for example in healthcare or technology.
That’s why it’s important to try to diversify as much as possible when you invest, by purchasing shares of companies that are different sizes.
Good to know: Small-caps, mid-caps, and large-cap stocks can also be either growth or value stocks, and vice versa.