Once you begin investing, or even researching investments, you’ll likely encounter plenty of terms professionals in the field expect you to understand. If you read the Wall Street Journal or watch CNBC, journalists will often toss around phrases like “bull market” and “penny stocks” without defining them. If you don’t understand a phrase you encounter in the financial media—or something your broker tells you—ask for an explanation or look the term up. Don’t get embarrassed about your lack of knowledge. Ignorance can be hazardous to your wealth, and shrewd investors won’t buy anything—or fill out a form, answer a personal question, or make a financial commitment—until they understand the ramifications of their actions.
The exchange names presented above are a good start when it comes to learning the vocabulary of investment, but you should take a minute to visit
the Glossary at the end of this book as well. It includes many of the most important financial concepts beginning investors should know. Reading the
Glossary won’t make you an expert overnight, but it should give you a better idea of what that CNBC anchorman is talking about.
Q&A Important Questions:
Of course, there is a lot more to investing than memorizing a bunch of terms. For answers to 10 questions that beginning stock investors often ask,
read on.
Question #1: How do I start investing in stocks?
Answer: Open an investment account with a broker. While a few hundred companies allow you to buy your first share of stock directly from them, most companies trade their shares only on stock exchanges or through dealer networks. A brokerage account will give you access to thousands of stocks, as well as thousands of mutual funds and other investments. Most brokers make the account set-up process easy, particularly if you use the Internet. Visit the broker’s website and fill out an account application. After you set up the account and send in your money, you can begin making trades. For tips on how to select the right broker.
Question #2: How much money do I need to start investing in stocks?
Answer: Not as much as many investors think. In a perfect world, you’ll jump into the market with $100,000—enough to purchase a diversified
portfolio of stocks all at once. But if you don’t live in that perfect world, you must set your sights a bit lower. Even if you can spare only $5,000 or $1,000, you can still invest in stocks. Just don’t buy as many. Of course, limiting yourself to just one company’s stock, or a small number of stocks, invites risk. But while you take on some risk when you purchase only one or two stocks, choosing not to invest exposes you to another type of risk—poverty. Chapter 10 explains the risks associated with choosing investments in more detail. If you’ve set up an account at a discount broker charging $10 per trade, purchasing $1,000 in stock will cost you 1% of your investment in commissions. That means your stock must return about 1% before you recoup the cost of the investment. As a rule, investors should try to limit their commission costs, preferably keeping them below 0.5% of the portfolio value for the year. As the portfolio grows, your trading commissions should decline as a percentage of the assets Errors of Commission But if you have only $1,000 to invest, take the leap and pay the commission. After all, you’ve got to start somewhere. If you commit to investing, you’ll be adding new money to the account over time. Spend a few years watching your stocks increase in value, and after a while the commissions won’t take such a big bite out of the whole.
