Investing in the stock market can be a good way to take advantage of compound growth and accumulate the money you need to reach your financial goals. However, the stock market itself may seem intimidating if you’re someone who has never invested before.
At Addition Financial, we believe in educating our members about their finances and making complex topics accessible. In this post, we’ll define some of the most important stock market terminology and provide you with the best investment tips our financial experts have to offer to beginning investors.
Stock Market Terminology to Know
Let’s start with some quick definitions, so you’ll understand the tips provided by our experts and know how to start investing.
The Stock Market is a collection of exchanges where people issue, buy and sell public shares of companies. The New York Stock Exchange gets the most attention but it is only one exchange of many.
Arbitrage is an investment method where an investor buys stocks on one exchange and sells them on another at a different – ideally higher – price.
Bear Market is a term used to describe a downward trend or a period of falling prices. A falling market may also be referred to as “bearish.”
Bull Market is the opposite of a Bear Market – in other words, an upward trend with rising prices. A rising market may also be referred to as “bullish.”
Blue Chip Stocks have a solid reputation of good financial management and a history of returning solid dividends to investors.
Brokers are agents who buy and sell stock on behalf of their investor clients in return for a commission.
Capitalization refers to the total value of a company’s issued stock. You may hear related terms such as large cap, medium cap, small cap and micro cap. As a rule, large cap stocks are less risky than small cap stocks.
Day Trading is an investment strategy that involves buying stock and selling it on the same day. It can be risky.
Diversification is the process of spreading out investments over multiple companies and accounts to minimize risk. A diversified portfolio provides more financial security than a portfolio that is not diversified.
Dividends are a portion of a company’s earnings that are paid out to shareholders, often on a quarterly basis. Not every company pays dividends but buying stock in companies that do can help you earn regular income.
An Exchange Traded Fund (ETF) is a fund that tracks a collection of stocks and may be bought and sold in the market. A well-known example is the SPDR S&P 500 ETF, which tracks the Standard & Poor’s 500.
An Index Fund is a collection of stock used as a reference for the performance of the stock market as a whole. Two of the best known indices in the United States are the Dow Jones Industrial Average and Standard & Poor’s 500.
Initial Public Offering (IPO) is the first offering of a company’s stock to the public.
Margin accounts allow investors to borrow investment funds from brokerage firms to make investments. The difference between the security and the price of the stock purchased is the margin.
A Mutual Fund is a financial vehicle that allows individual investors to participate in a professionally-managed portfolio.
Pink Sheet Stocks (or Penny Stocks) are low-cost shares traded at $5 or less.
An Investment Portfolio is a collection of stocks owned by an investor.
A Rally is a rapid increase in the overall price of the market or the price of an individual stock.
A Sector is a collection of companies in a single industry. For example, Apple and Google are both in the technology sector.
Short Selling is the process of borrowing shares from a broker with the hope that the price will fall. If it does, the difference between the prices is your profit.
Volatility is a word used to describe an unpredictable market. Stocks that experience daily rises and falls in their prices are sometimes referred to as high-volatility stocks.
Yield is a term used to describe the return on investment earned by dividend payments. It is calculated by dividing the annual dividend earned by the price you paid for the stock. For example, if you paid $100 for a share of stock and earned a $5 annual dividend, your yield would be 5%.
Investment Advice for Beginning Investors
Now, let’s look at some advice for people who want to invest in the stock market. We reached out to some financial experts and our team at Addition Financial to get the best advice possible.
Invest Early
What is the ideal time to start investing? The first piece of advice that beginning investors should hear is not to let your lack of experience or knowledge prevent you from making your first investment. Starting early is the best way to accumulate wealth and ensure you have the money you need to retire.
One of the best ways to begin your retirement plan is by taking advantage of your employer-sponsored retirement account or by starting a Roth IRA. Maxing out your 401(k) contributions will help your money earn money – and if your employer offers matching funds, your retirement savings can benefit from those as well.
Be Patient
One of the most difficult things to do as a new investor is to be patient with your investments. Jenna Lofton is a Certified Financial Advisor at StockHitter.com. She told us that the most useful piece of advice she can offer to beginners is this:
“The most important advice I can give to beginning investors is that they need to be patient. It will take time for them to learn about the market and find out what works for them. Don't get wrapped up in the month-to-month price changes of specific stocks as looking at these changes may cause an investor to panic sell something they've worked hard on building.”
The stock market can be volatile and when that happens, you may feel like there’s a reason to panic. Remember that the overall trend of the stock market is up. If you don’t need your money immediately, there’s no need to panic if the market drops.
Research Before You Buy
When you need to buy a new TV or laptop, you probably spend a lot of time reading online reviews and comparing features before you get out your credit card. The same strategy should apply to stock market investments.
Raj Patel of Financeshed gave us this advice for beginning investors who are wondering, “How should I decide where to invest my money?”
“Beginners should study and research... before entering into the stock market and [understand] how the stocks they are interested to invest in [are] categorized. They can start investing with small-cap stocks, book the profit and invest that in low-risk stocks to create wealth. This way you can roll over your capital and increase it slowly and gradually.”
It’s always a good idea to learn about the stock you want to buy before you buy it. If you work with a financial advisor, a financial planner, or use a robo advisor, you can get access to information to find the best investment option for you.
Diversify Your Portfolio
You’ve heard the aphorism, “Don’t put all your eggs in one basket.” It’s used to describe any situation where it might be risky not to have a contingency plan – and it applies to the stock market, as well.
Jake Hill is the CEO of DebtHammer. He offered this advice for beginning investors:
“Invest in many different stocks and plan for steady growth. Don't put all of your faith behind one stock. Especially a fad stock. You don't have the know-how to play the market and get out before you get burned.”
Diversification can take many forms. It may mean buying stocks at different capitalization levels and in different sectors, and including a combination of mutual funds, exchange traded funds and stock. You should review your asset allocation periodically and redistribute your risk as needed to align with your risk tolerance and investment objectives.
Start Small and Set Limits
Our final piece of advice comes from Shannon Terrell. She’s a Senior Investments Writer at Finder. She told us that the most important advice she offers to beginning investors is this:
“Start small and set limits. If you’re keen to back the next big tech startup, allocate a small percentage of your portfolio – say 10% – to higher risk growth stocks. Reserve the rest for buy-and-hold investments that you diversify across multiple sectors and categories. There’s nothing wrong with taking risks, so long as you set clear limits on how much you’re willing to spend – and potentially lose.”
In other words, there’s nothing wrong with taking some risks and buying startup stock if you want to. However, it’s not a good idea to do only that, which means setting limits and not getting carried away with the idea that you can get rich overnight. As you build your portfolio and learn more about different types of investments, you can branch out and take more risk where it makes sense in your investment plan.
Investing in the stock market is something that can help you build wealth and achieve your long-term financial goals, including paying for your kids’ college educations and enjoying a secure retirement. The definitions and tips we’ve included here will help you get started with your very first stock market investments.
Do you need some help getting the investment ball rolling? Click here to read about Addition Financial’s MEMBERS Financial Services Program and book an appointment with a CUNA Financial Professional.
