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In this Article: A complete Beginners Guide to Stock Investing.
Our investor education series will point you in the direction of the best tools, information, and resources the internet has to offer toward becoming an investor.
This introduction is meant to strip away the layers of obstruction that keep many people from opening an investing account and getting started today. Because today is the absolute best day to get started; as we’ll discuss later, time is your best friend – but only if you let it be.
Let’s begin by talking through some of the cornerstones of stock investing. Lots of people start their stock investing journey with preconceived notions, based on some accurate and some decidedly non-accurate depictions of stocks in movies and television.
We’ll break down what stocks really are, what they do and don’t offer for you, and what services and institutions are there to provide you access, safety, and ease of use.
What exactly is stock?
Stocks represent a percentage of ownership in a company that is publicly traded. All the companies with “tickers” that run across the bottom bars of business channels like CNBC and Bloomberg? All of those are publicly traded companies, and all those companies offer individual shares of stock to you or anyone who wants them.
Stocks trade on stock exchanges, each with a unique letter combination or ticker (from one to four letters, such as “F” for Ford Motor, and “MSFT” for Microsoft). You’ve likely heard of these stock exchanges, like the Nasdaq and the New York Stock Exchange.
Other countries around the world have their own stock exchanges, and some companies based in foreign countries have shares trading on both international and U.S. stock exchanges.
These exchanges ensure that every single transaction – whether it be one share or 1 million shares – is held to the same rigid standards and financial backstops. Brokerages, like Charles Schwab, E-Trade, Acorns, TD Ameritrade, and Merrill Lynch take buy & sell instructions from investors like you and process your trades on the various stock exchanges.
Then through the brokerage account you hold, you deposit and withdraw cash monies as you wish. There has been sweeping changes to major brokers in the past year, with all the major players slashing their commissions on stock trades (the flat fee charge to place a buy/sell order) to $0.
In addition, these financial institutions offer services such as setting up individual retirement accounts (IRAs), and personal financial planning.
Almost no shares are held in physical form anymore – nobody gets stocks in the mail and files them away in a drawer or safe. Everything is digital now, with all transactions recorded meticulously by banks, exchanges, government regulators, and financial custodians.
What Do You Get with Stock Ownership?
Textbooks will say that as the owner of a company’s stock, you have a claim to the total net earnings, over time, of that company. The textbooks will also say that your claim as a shareholder is proportional, based on the number of shares (and therefore the percentage of the company) that you own.
So, if you owned 1% of all the shares of Apple (NASDAQ, AAPL) (you lucky dog!) you would own a claim to 1% of all the future net earnings of Apple. So long as you continued to hold that 1% of Apple’s shares, you would hold the 1% claim.
This is both true, and not true. And it is easiest to explain by just walking through the Apple example a little further. Apple earns tens of billions in profit every year, but it does not pay all that money out to shareholders.
Potential Dividend Payments
It pays a small amount out in the form of a cash dividend, but the vast majority of those profits stay at Apple, and are put towards future growth, acquisitions, and frankly whatever Apple chooses to do with it.
The only time that the textbook definition of a stockholder’s claim of a company really comes into play is when a company is liquidating itself and shutting its doors. In any real-world scenario of Apple Inc. over the next 10 years, they are not shutting their doors.
They’ll continue to make tens of billions in profit every year. And you, as the lucky owner of 1% of all AAPL shares, will see the value of your shares rise and fall based on the perceived ability of AAPL to make tens of billions of dollars out into the future.
So, the most proper way to look at buying stocks is this: You are getting a small piece of the total estimated value of that company, a value that stock investors “vote” on by buying or selling AAPL shares.
As a company like Apple does well in the future, the total estimated value of the company will rise. And this makes intuitive sense, because the company is proving to the world, “Look how we keep making more money each year than the year before. Pretty cool, huh? We’re a good company, a good investment”.
And as more people see the true value of a strong company, shares rise. And if the company starts out with big expectations in the eyes of investors, but then falters, the value of shares in that company will drop. As they should.
In addition to the stock prices being based on the individual performance of just that company, if the broad economy falls into a recession, the value of all shares of all stocks will tend to fall, just as the value of all homes fell for a few years following the housing crisis of 2007-2008.
The ebb and flow nature of investing is universal, across stocks, bonds, homes, art, cars – literally anything that dollars can be exchanged for!
Liquidity & Security – An Investor’s Best Friends
One of the most important features of stocks is what we finance geeks call “liquidity”. This just means, “How fast can I get my cash back out, and how much will it cost me to do it?”. And in any financial transaction, security is key. A trade is only as good as the faith and security of the party you are transacting with.
Buying homes, cars, jewelry, cryptocurrency, art, collectibles – all these things can be profitable over time, but they do not offer good liquidity. To sell any of these things requires either quite a bit of time, quite a bit of fees, or a combination of both!
There’s also extra security costs and measures that need taking when investing in something physical or working with an untrusted third party. You must protect things, guard against things, maintain the health of things – all to get maximum value for it later. With stocks, ETFs, and mutual fund transactions, you always have multiple layers of insurance and backing, from the largest financial institutions on the planet.
Low-Fee Stock Investing
The combination of low/no fees to process stock trades, and federal backing of brokerage account balances – this combination simply can’t be beat. There’s no safer way – and no safer time in history – to put investment dollars to work than right now in the stock market.
And there is a handy new trick that startup brokerages like Robinhood are offering, whereby an investor can buy fractional shares of companies. Like Amazon (NASDAQ: AMZN), but do not have $3,055 lying around to purchase a single share? Some brokerages allow you to invest the Amazon’s of the world with as little as $1 at a time.
A keynote about the prices that different stocks trade for – more expensive does not mean “better”. AMZN shares trade for over $3050 per share, while Uber Technologies (NASDAQ: UBER) trades for around $31 per share.
This does not mean that AMZN is 100 times as large as UBER, or automatically a better investment. The prices of individual shares are unique to the company; do not make the mistake of thinking that high-priced must be better and lower-priced must be worse.
We’ll talk more about the features and metrics of individual stocks that inform investors about the size, performance, and prospects each stock represents.
Stock Investing: Time is Your Greatest Ally
Albert Einstein once said, “Compound interest is the eighth wonder of the world.” He was fascinated by it mathematically and given that this is Einstein we are talking about, it’s probably good to take notice of things that blew his mind.
Compound interest is the phenomenon where seemingly small percentage growth, starting from a fixed base of investment dollars, becomes exponential growth over time. With the added benefit of dollar cost averaging, you will be well on your way to millionaire status.
Compound Interest Example for Dummies
Let’s say you put $10,000 into the stock market, and that $10,000 earns you 7% profit every year for 10 years. (FYI, the long-term average return of the stock market has been about 9% for the past 50 years).
A brief glance might make one think that the total growth over those 10 years is 70%, but it is not. If the initial $10,000 investment was left untouched the whole time, that $10,000 is now $19,671, for a 96% return, not a 70% return.
And the effects get stronger as more time passes. In 20 years, earning 7% per year, that $10,000 will not have grown just 140%, but 287%. This is the magic of compounding, why Einstein was fascinated, and why all stock investors have time as their biggest ally.
Any investor under the age of 50 should not be thinking about “What can I make in a month, or a year?”. Instead, investors should start their investment journey with a long-term focus, thinking, “What can I make in decades?”.
The polar opposite of this approach is an investor looking to make a “quick buck”. To be sure, plenty of people do that. But it requires more time, energy, and focus – and more mental fortitude than just buying an ETF with 500 stocks in it, sitting back and being patient for 10 years.
Wrapping Up: Beginners Guide to Stock Investing
Now that we’ve laid out the cornerstones of what stocks are, it’s a great time to ask yourself some key questions about stock investing. Maybe you’re jazzed about gathering tools and trusted financial resources, and just diving in headlong.
Maybe you have some companies you’ve been following or hearing about and are interested in learning more about them. If so, great – it is a journey that can last a lifetime and will absolutely never become boring!
But some people just don’t want to put a lot of time into things. They want easy methods to invest, fast methods to invest, no muss/no fuss and minimal maintenance. And that is fine too – it is even advised for many. Stocks rise and they fall, and over short windows of time, the moves up and down can look very dramatic. Not everyone is cut out for the daily drama.
Over long time frames, stocks outperform every other readily available investment opportunity.
For investors who want exposure to the stock market but do not want volatile swings or to spend hours per week doing what they deem “financial homework”, mutual funds and ETFs are the best option.
For a very small fee (less than 1% per year), you can grab a large basket of stocks with just one purchase. There are thousands of ETFs to choose from. Some with a focus on specific countries, some focused on specific industries, and others with overarching policies about investing in socially conscious companies.
Going back to our opening remark about preconceived notions, stock investing often carries an air of, “only the rich do that”. It is an outdated mode of thinking. A more accurate depiction would be to say, “Stocks are how the rich become rich”.
Most of the world’s wealth has been created by people investing in companies that were once small. Those companies are now known as Microsoft, Amazon, Google, and Apple. That access, that power to create large rewards and to leverage time as an ally, is available to all who seek it.