Stock Investing For Dummies

Paul Mladjenovic

• Publisher: For Dummies
• Year: 2020
• ISBN:
  9781119660828
• Edition: 6
• Topic: Negocios y empresa
• Subtopic: Acciones

The bestselling guide to holding steady through the stock market's highs, lows, and stable stretches

When you decide to jump into the stock market, there's a lot to know. Stock Investing For Dummies covers the factual and emotional aspects of putting your money into stocks. In clear, easy-to-understand language, this book explains the numbers behind the stocks, the different categories of stocks, and strategies for building a solid portfolio. On the flip side, it also addresses the emotional aspects of investing: setting goals, knowing when to sell, and balancing risk vs. return.

For nearly a century, the well-to-do have been building their wealth by investing in stocks. Here's your opportunity to do the same. The sooner you start investing, the sooner you'll see your money grow. Make that a reality by discovering:

• Approaches for investing for income or growth
• Steps for evaluating your financial health, setting financial goals, and funding your first purchases
• How to read stock tables and pull information out of stock charts
• What to look for on balance sheets, income statements, and annual reports to choose strong performers
• Advice for minimizing losses and maximizing gains
• Tax implications and how to reduce their impact on your earnings
• Suggestions on what to do and buy in a down market

Put all of this information together, and you have a straightforward resource that helps you build and manage a portfolio that will serve you well for years to come. Stock Investing For Dummies gives you the confidence you need to send your portfolio soaring!

Part 1

The Essentials of Stock Investing

IN THIS PART …

Find out what you should do before you invest your first dollar in stocks. Evaluate your current financial goals and situation.

Know the different approaches to stock investing and which may be right for you.

Figure out the risks of stock investing and discover the best ways around them. Understand the concept of volatility.

Invest in the best stocks with a single exchange-traded fund (ETF) purchase.

Chapter 1

Surveying the World of Stock Investing

IN THIS CHAPTER

Knowing the essentials of stock investing

Getting ready to purchase stocks

Using what you know to pick successful stocks

As I write this, the stock market is near an all-time high (circa 29,000), and the economy is rebounding to generational highs in employment and a return to improved prosperity for Main Street America unseen in decades, which bodes well for stock investors in the near term. I think that there are great stock investment opportunities in virtually any time — even for newbies. There are great stocks to help you build your wealth (or provide dividend income) in both up and down markets. In fact, a bear (or down) market can be a great time to buy stocks because they’re cheaper (think “sale!”). The key is knowing what to do (and even why), but that’s what this book is for!

Today’s stock market is a little puzzling, but it can still be rewarding. I can only promise you that if you read this book seriously, you’ll do much better than the average investor. Note that patience and discipline count now more than ever.

The purpose of this book is not only to tell you about the basics of stock investing but also to let you in on solid strategies that can help you profit from the stock market. Before you invest, you need to understand the fundamentals of stock investing, which I introduce in this chapter. Then I give you an overview of how to put your money where it will count the most.

Understanding the Basics

The basics of stock investing are so elementary that few people recognize them. When you lose track of the basics, you lose track of why you invested to begin with. Part 1 of this book helps you grasp these basics:

• Knowing the risk and volatility involved: Perhaps the most fundamental (and therefore most important) concept to grasp is the risk you face whenever you put your hard-earned money in an investment such as a stock. Related to risk is the concept of volatility. Volatility refers to a condition in which there is rapid movement in the price of a particular stock (or other security); investors use this term especially when there’s a sudden drop in price in a relatively short period of time. Find out more about risk and volatility in Chapter 4.
• Assessing your financial situation: You need a firm awareness of your starting point and where you want to go. Chapter 2 helps you take stock of your current financial status and your goals.
• Understanding approaches to investing: You want to approach investing in a way that works best for you. Chapter 3 defines the most common approaches to investing.
• Seeing what exchange-traded funds have to offer: Exchange-traded funds (ETFs) are like mutual funds, but they can be traded like stocks. I think that every stock investor should consider ETFs as a positive addition to their portfolio strategies. See Chapter 5 for the lowdown on ETFs.

The bottom line in stock investing is that you shouldn’t immediately send your money to a brokerage account or go to a website and click “buy stock.” The first thing you should do is find out as much as you can about what stocks are and how to use them to achieve your wealth-building goals.

Before you continue, I want to clarify exactly what a stock is. Stock is a type of security that indicates ownership in a corporation and represents a defined portion (measured in shares) of that corporation’s future success. The two primary types of stocks are common and preferred:

• Common stock: This type of stock, which I cover throughout this book, entitles the owner to vote at shareholders’ meetings and receive any dividends that the company issues.
• Preferred stock: This type of stock doesn’t usually confer voting rights, but it does include some rights that exceed those of common stock. Preferred stockholders, for example, have preferential treatment in certain conditions, such as receiving dividends before common stockholders in the event of a corporate liquidation or bankruptcy. Additionally, preferred stock seeks to operate similarly to a bond for investors seeking stable income. (In this book I mostly cover common stock.)

In addition to common stock, in this edition, I also cover exchange-traded funds (ETFs) because they can be a valuable part of the stock investor’s portfolio.

Preparing to Buy Stocks

Gathering information is critical in your stock-investing pursuits. You should gather information on your stock picks two times: before you invest and after. Obviously, you should become more informed before you invest your first dollar, but you also need to stay informed about what’s happening to the company whose stock you buy as well as about the industry and the general economy. To find the best information sources, check out Chapter 6.

When you’re ready to invest, you need to open a brokerage account. How do you know which broker to use? Chapter 7 provides some answers and resources to help you choose a broker. After you have opened a brokerage account, it pays to get familiar with the types of orders you can implement inside that account; find out more in Chapter 17.

Knowing How to Pick Winners

When you get past the basics, you can get to the meat of stock-picking. Successful stock-picking isn’t mysterious, but it does take some time, effort, and analysis. And the effort is worthwhile because stocks are a convenient and important part of most investors’ portfolios. Read the following sections and be sure to leapfrog to the relevant chapters to get the inside scoop on hot stocks.

Recognizing stock value

Imagine that you like eggs, and you’re buying them at the grocery store. In this example, the eggs are like companies, and the prices represent the prices that you would pay for the companies’ stock. The grocery store is the stock market. What if two brands of eggs are similar, but one costs $2.99 a carton, and the other costs $3.99? Which would you choose? Odds are that you’d look at both brands, judge their quality, and, if they’re indeed similar, take the cheaper eggs. The eggs at $3.99 are overpriced. The same is true of stocks. What if you compare two companies that are similar in every respect but have different share prices? All things being equal, the cheaper price represents a better buy for the investor.

But the egg example has another side. What if the quality of the two brands of eggs is significantly different, but their prices are the same? If one brand of eggs is stale, of poor quality, and priced at $2.99 and the other brand is fresh, of superior quality, and also priced at $2.99, which would you get? I’d take the good brand because they’re better eggs. Perhaps the lesser eggs are an acceptable purchase at $1.99, but they’re overpriced at $2.99. The same example works with stocks. A poorly run company isn’t a good choice if you can buy a better company in the...