Stock Investing Basics
If you haven’t already, subscribe to our newsletter here to get our articles delivered directly to your inbox and follow us on Twitter, Instagram, and YouTube! In our Educational Series we will be taking a deep dive into different ways to invest your money in hopes that one or multiple of these methods strikes you as interesting and encourages you to invest your money to grow your wealth.
I’ve created a brokerage account, now what?
In our previous article titled “How to get started in Stock Investing,” we broke down different ways to invest in stocks. Even if you’re not investing in stocks yourself (that is, you’ve hired a professional or signed up for an automated account with preset investment portfolios), you should still be aware of where your money is being invested. First you’ll need to open a brokerage fund, which we broke down on our YouTube channel here.
To get started you’ll need to know your options on what you can invest in with your brokerage account. There are four different ways to invest in stocks: index funds, exchange traded funds (ETFs), mutual funds, and single company stocks. Index funds, ETFs, and mutual funds allow you to invest in multiple companies by buying one stock. Single company stocks, on the other hand, are a vehicle for investing in individual companies like Amazon, Apple, or Facebook - they allow you to purchase shares of the company. Many investment strategies require a lot of research, which we’ll dive into next week! For now, we just want to provide brief summaries of index funds, ETFs, mutual funds, and single company stocks.
What are index funds, ETFs, and mutual funds?
An index fund is a portfolio constructed to match or track the components of a financial market index that is passively managed. One of the popular index funds is the Standard & Poor’s 500 Index (S&P 500) which tracks the 500 largest, most well-known U. S. based companies. An index fund is generally viewed as ideal core portfolio holdings for retirement accounts such as individual retirement accounts (IRAs) and 401(k) accounts. It’s a popular choice for retirement accounts because it's a passive form of investing with good annual returns (relatively speaking). According to investopdia,the average annual return of the S&P 500 index from 1957 through 2018 is ~8%. An index fund can only be bought at the beginning and end of the trading day and it cannot be traded throughout the day.
An exchange traded fund (ETF) is similar to an index fund in that it is passively managed, which tends to realize fewer capital gains than actively managed mutual funds (see below). In general, ETFs tend to cost far less than purchasing all the companies that it holds but typically includes a fee for whoever is managing the ETF. An ETF can be sold short and traded throughout the day while the market is open. Because of this, ETFs are priced continuously by the market, which could lead to simultaneous purchase and sale of the same asset in different markets in order to profit from tiny differences in the asset’s listed price (this is known as arbitrage). There are three kinds of ETFs: open-end index mutual funds, unit investment trusts, and grantor trusts. Getting into the weeds of these is not necessarily as important as understanding the differences in ways to invest in the stock market, which is the scope of this article.
A mutual fund typically has a higher minimum investment than ETFs and is actively managed. There are varying minimums depending on the type of fund and company, for example the Vanguard 500 Index Investor Fund requires a $3k minimum while The Growth Fund of American offered by American funds requires a $250 initial deposit. These mutual funds are actively managed by a fund manager or team making decisions to buy and sell stocks or other securities within that fund in order to attempt to beat the market to help their investors profit. Because these funds are actively managed, they generally come with a fee.
What about single stock investing?
Single stock investing is purchasing shares of an individual company/business. There are many different strategies on how to pick which companies to invest in and when to invest. Most of these stock investing strategies involve looking at the finances of the company (for example their annual revenue, expenses, earnings per share, etc.) as well as taking into account different qualitative measures (for example, who is the company’s CEO) in order to determine whether the stock is right for you! We’ll get into the different ways to analyze stocks next week. For now, prior to investing into stocks, make sure you understand one key point: when you are purchasing a stock, you are purchasing a business, not a ticker symbol or a chart on the screen.
Finish out the week strong!
Brandon and Dan
The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.