Financial abundance

Financial investment, the basics

A few days ago, I saw an article stating that a new type of investor is joining the market, who is less aware of what stocks are and what indexes are. These investors ask question like “What is the Stock Market,” “What is the DJIA, ” and “What is the S&P 500 ”. This made me think to give an brief overview on the things I think are important to understand before starting buying stocks.

The difference between long and short?

Understanding the difference between long and short is one of the fundamental things when you want to start investing on the stock market. To keep it simple if you go long on a stock, you invest in the stock hoping the stock will rise in price. If you go short on a stock you sell a stock that you do not own leaving you with the obligation to return the sold stock in the future. In simple terms you borrow a stock and sell it, hoping the stock will lose value so you can buy it back cheaper an in this way making a profit.

What is an index? And how do the relate to ETF’s?

An index is a group of companies, they can be grouped on various way depending on the index itself. The DJIA “Dow Jones Industrial Average” tracks the 30 biggest company stocks listed in the US. The S&P 500 is similar but tracks the 500 biggest companies in the US. Next to indexes like the DJIA and the S&P 500 there are indexes that track industries or things like rare metals.  Some of these indexes can be bought buy investing in ETF’s. These ETF’s buy a slice of stocks from the market in comparison to the index.

Market order, Limit order, Stoploss.

When buying or selling stocks you have a few options 3 of the most import variations are:  Market order, Limit order, Stoploss. A market order is saying buy x amount of this stock for any given price. A limit order is saying buy x amount of stocks for a certain price or lower and a stoploss is sell or buy a stock when the price passes a certain price point. A stoploss can be used to limit the loss in the case a stock drops in value “when long”.

Dividend.

Dividend is King. If you look at what return the most gains over a long time its dividend and reinvesting that dividend. There are ETF’s that will reinvest the dividend for you, or you can simply invest it yourself. But what is dividend: “A dividend is a distribution of profits by a corporation to its shareholders.” This distribution of profits can happen at various moments, some companies pay a dividend once per quarter, twice a year or once a year. Important is the total percentage of dividend paid. At current, an index like the S&P 500 only pays around 1.9% dividend. This is the average of all companies. Important to understand here is that some companies pay more, and some pay none. A typical dividend stock should pay around 4% dividend.

Some advice when starting on the market.

When starting with investment I would advise a few things.

Long vs short risk.
I would advice if you start investing to not start with short selling stocks, this due to the risk associated with this. The gain when going short is limited to a 100% but the risk is unlimited when the stock rises rapidly. When going long the reverse counts, the maximum loss is the amount you invested, but the maximum gain is in theory limitless. So when starting, start with buying stocks” going long”.

Spread.
It is important to build in spread in your portfolio, to limit the risk of loses. This is why ETF’s are a handy way to invest, dependent on the ETF you have a certain spread. For example, the S&P500 has a pretty good spread, limiting the risk of losing but also limiting the grow you make. When ever you invest in ETF’s or in stocks I would advice to spread, so not put all your money in one single thing this counts even for ETF’s.

Strategy

Important when starting to invest is what is your strategy. The market always moves up and down and if you do not follow a strategy you might end up losing money due to wrong timing.
I decided that I have stocks that I have for their dividend and I won’t sell and I have growth stocks that I have for their potential growth and that I am willing to sell if the price is right. The hard thing here is when is the price the right price and that is part of the game. A stock at an all time high might even go higher or go down and never return.

To conclude.

Know what you invest in do some research and know the risk that you take. A stock that has gone up for a while might come down some day.