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Stocks 101

  1. What are different kind of stocks?

Stocks are fractional ownership of companies. Specifically, they are publicly traded companies,  which can be bought and sold by anybody. For example, any person willing to purchase a stock can become a fractional owner in a publicly traded company like Apple. 

Stocks come in many shapes and sizes. There are stocks which represent foreign companies, small to large companies, or even entire sectors like banks which is called an exchange traded fund. There are stocks designed to employ specific strategies like high growth sectors or utility stocks that represent individual companies or a group of them. Numerous other approaches are available including purchasing stocks for leverage against the Nasdaq. 

  1. How do you invest in stocks?

There are multiple ways to invest in stocks. You can open an account with a discount broker like TD Ameritrade  or Charles Schwab where you deposit money and use an online interface to buy securities. You an also invest in a dividend reinvestment program where you pay a small amount each month to invest in a single account or an index. You can also invest in mutual funds through an investment advisor.

  1. How do you choose a brokerage?

Brokerage is a way to buy or sell. Brokerage firms come in different shapes and sizes. Like the gas stations of our parents generation, some are full service, and others are mere facilitators which provide the pump, but require you to do the work. A full service brokerage will talk to you about your goals and address questions ranging from risk to college planning.  A limited service brokerage takes your money and your directions and implements the trade on your behalf. 

You an also think of brokerages like hotels. Some hotels just provide a room and coffee in the morning.  Others are full-service and might include room service, restaurants, and a concierge to help you solve problems and accomplish your specific goals. A similar approach applies to brokerage firms. You can choose between those which offer a wide variety of services for a premium, and others that primarily facilitate your purchase. 

To select a brokerage firm it helps to get recommendations from individuals you may know who have similar investment goals to your own and who have enjoyed a positive experience with their brokers. Alternatively, you can use your internet search engine and type “brokerage full service” or “brokerage discount,” if you want limited service and already know your investment objectives. 

  1. How does stock performance compare to other investments?

The market (S&P 500) as a whole, when evaluated over over a period of time, is a high returning asset class. Sometimes venture capital or real estate can do better, but historically stocks tend to improve. That being said, they can perform quite poorly at any given moment.  Any given stock might have a 20% to 50% loss of value in the moment and yet still be reasonably successful over time. They may suffer loss for reasons external to the company including war, the Index, oil prices or any of a host of issues which impact the market. Perspective and time is important when evaluating individual stocks because it is difficult to predict the future. Stock success is company specific, but if you have a company with competent employees which tries to provide a service with excellence and is managed well, including looking for ways to improve efficiencies and cut costs, their stock will tend to perform well over time. In the end, stocks typically offer higher inflation adjusted returns than many other investments like bonds, but they come with more risk of volatility of price. 

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Erik Weir