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January 31 - February 2, 2021
When you are first getting started, you should try out many different trading and investing strategies and see what works for you.
Here's another way to think about it. McDonald's is like a pie that has 765,317,332 slices (shares outstanding). As I am typing these words, each of these slices is valued by the market at $187.62. That's what we mean when we say that the stock is trading at 187.62. Now let's take the total number of slices and multiply it by the price per slice. We get about $143.58 billion. That's the current total value of this "pie" that we call McDonald's. Another word for this is "market cap" or "market capitalization."
When we hear that Apple has become the biggest company in the world, we usually mean that it has the highest market cap.
similar. It tries to figure out what is most likely to happen over the next 3-6 months, and then prices stocks accordingly. That's why we say that the stock market is a "forward-looking mechanism" or "discounting mechanism."
Sometimes a stock will report great earnings (i.e. tell everyone that it had a good quarter and made a lot of money), but still fall sharply the next day. It does this because traders are reacting to something else in the earnings call or in management's forward-looking statements. The stock is “skating” to where the company is going to be in a few months.
When one is buying millions (or even billions) of dollars worth of stock, as these players are, one cannot do it simply by pressing a button. It can take hours, days, or even weeks.
Some people like to buy stocks and hold them for many years. We call them "investors."
Other people like to buy and sell stocks more quickly, maybe holding them for only an hour, a day, a week, or a month. We call these people "traders."
Stocks are usually bought and sold on what are called "stock exchanges."
A stock exchange is a little bit like an eBay for stocks.
The most well-known exchanges in the U.S. are the New York Stock Exchange (NYSE) and the Nasdaq. The NYSE is best known for its blue chip (high-quality) stocks like Coca-Cola and McDonald's. The Nasdaq is best known for its tech stocks like Netflix and Apple.
NYSE stocks are usually identified by a two-letter unique "ticker" (stock symbol) like KO (Coca-Cola) or HD (Home Depot). Nasdaq stocks usually have four-letter tickers like AAPL (Apple) or NFLX (Netflix). Occasionally you'll al...
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As an individual, you cannot trade directly on a stock exchange. For that you will need a "broker" or "brokerage account."
In the U.S., well-known brokers include Charles Schwab, Interactive Brokers, TD Ameritrade, TradeStation, Fidelity, and E*Trade.
Robinhood.com is great because they allow you to buy and sell stocks without paying a commission (fee).
When you are buying a stock, you will be given the choice of using two different kinds of orders. The first is called a "market order." This order tells the broker to get you into the stock as quickly as possible, regardless of price. If you use a market order, you might end up buying the stock at a price that is far away from where it last traded.
This is because every stock has a bid price and an offer (or "ask") price. The bid is the price at which someone is willing to buy the stock. The offer is the price at which someone is willing to sell the stock. Memorize this phrase right now: “You sell to the bid, and you buy from the ask.”
The distance between the bid and the ask is called the...
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A liquid stock is defined as a stock where you can buy or sell a lot of shares without moving the stock too much. Liquid stocks in the U.S. usually have a bid-ask spread of just a penny or two.
If you place a market order to buy a liquid stock, you will usually be OK.
However, if you use a market order on an illiquid stock, you might get a price that is far away from the current market, or from where the stock last traded.
it is usually best to stay away from illiquid stocks.
A limit order is the second type of order, after a market order. Whereas a market order tells your broker to just get you into or out of the stock as fast as possible, a limit order specifies a price. So if you place a limit order to buy MSFT at 120.25, your order will only be filled if there is a seller that is willing to part with the shares at that price. If there is never a seller at that price, your order will never be filled.
I almost always use limit orders in my trading, even with highly liquid stocks.
A Day order will only be executed during regular market hours today. If the order has not been filled by the time the stock market closes for the day, it will be automatically cancelled by the broker.
A GTC ("good 'til cancelled") order will be good for today's market hours, as well as the following days and weeks. If you don't cancel it, it will still be working. Some brokers will automatically cancel a GTC order after a month or more, if it has not yet been filled.
If you are going to trade before the market opens or in the after-hours market, always use a limit order.
And please don’t ever trade an IPO using market orders. That is the ultimate newbie mistake.
Many investors choose to buy an index, rather than a single stock. An index is simply a collection (or "basket") of stocks. Let's say that we take the 500 U.S. stocks with the largest market caps and toss them into a big basket. That basket is called the S&P 500.
There's the Dow Jones Industrial Average (DJIA). This is a famous index that goes back to 1896. It always contains only 30 companies.
Another well-known index is the Nasdaq 100, which contains mostly tech companies.
Some smart people came up with the idea of the ETF ("exchange-traded fund"). An ETF trades just like a stock. You can buy or sell it all day long in your brokerage account. Each ETF represents a certain index. So the ETF for the S&P 500 trades under the ticker SPY. The ETF for the DJIA trades under the ticker DIA. And the ETF for the Nasdaq 100 trades under the ticker QQQ.
If you buy the QQQ and hold it for the long-term, you will be able to profit from the long-term growth of the tech industry.
Indexing is a form of "passive investing." Passive investing refers to any strategy that does not involve a lot of thinking ("which stocks should I buy today?”) or a lot of buying or selling.
When indexing, most people like to invest the same dollar amount of money into an index every month. That way, you never buy all of your stock at the very top of the market. By buying a stock or index/ETF at different times, you are allowing the wiggles of the stock to smooth themselves out, since you are always buying at a different price. By doing this, you end up getting a pretty good "average price.” That is why this practice is called "cost averaging.”
Another way to index is to buy a low-cost mutual fund like the Vanguard 500, which only charges you an expense ratio (annual fee) equal to 0.04% of your investment. By comparison, the SPY ETF charges a 0.0945% expense ratio, but allows you to trade in and out of the stock during the day. Mutual funds like the Vanguard 500 only allow you to buy or sell shares once a day based on closing market prices.
Most investors are probably better off starting with the SPY, since you can invest as little as a few hundred dollars. Currently, to invest in the Vanguard 500 mutua...
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Buying a stock index like the S&P 500 is a great way to get started investing. If you can, you should just buy some SPY and n...
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A dividend stock will usually make a cash payment into your brokerage account every 3 months. That cash payment is called a dividend.
When you own dividend stocks, the cash hits your brokerage account every 3 months, whether you have a job or not. It's a little bit like owning a rental property, except that you never need to go over to fix the toilet.
There's an easy way to own a piece of every Dividend Aristocrat: just buy some shares of NOBL. It is the ProShares S&P 500 Dividend Aristocrats ETF. It trades just like a stock, and you can purchase it using any brokerage account.
Owning a basket of dividend stocks over a long period of time is one of the best ways to build wealth.
Investing like Buffett is hard. You need to pick companies that are going to be around (and continuing to do well) in 20 years from now. And you must be careful not to overpay for them.
That being said, there's a really easy way to pick stocks like Warren Buffett: Just copy him.
Buffett has held most of these stocks for many years, so you probably won't get a chance to purchase any of them at his prices. That being said, occasionally one of his new picks will fall below his purchase price, and you will have the opportunity to purchase some shares at a lower price than Buffett himself paid.
You could also just buy a basket of these stocks that Buffett owns. Buy the basket of stocks, and then sell a stock only when you hear that Buffett has exited the position.
An even easier route might be to just buy some B-shares of Berkshire Hathaway (ticker: BRK-B). One share of stock in this company will cost you $203.27 today. You can then sit back and relax and let Warren Buffett, Ch...
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You want to own businesses that have good pricing power. This means that they can raise prices without losing customers.
It's extremely difficult to get rich owning a price-competitive business. If you sell corn, oil, or generic clothing, you have a lot of competition, and your margins are razor thin.
If someone wants an Apple laptop or a pair of Nike shoes, there's only one place to get them. That's why Apple and Nike can charge premium prices.
