What do I need to know before I start investing?
It's a common question that gets asked, more often than not, by women who just want to know how all this stuff works. Give it to us in simple, easy to get ways - cut the jargon please! So here we are with some investing terms all beginners and early day investors should know.
- Stocks & Shares
The terms stocks & shares are similar and used interchangeably. A stock is a small piece of a company that’s for sale for the public to buy. If a company wants to make money to help it grow, it will sell stocks or shares.
You buy shares based on the value of the company at that time. Your money will go to the company and in return you own a bit of it. Some shares give you the right to earn a payment back, if the company makes a profit each year (called a dividend - but we’ll get to that later!). If the company grows and becomes more successful your shares will go up in value. One day, when you choose to sell them to other people or back to the company, you’ll hopefully earn more money than you first put in!!
- Stock Market
The stock market is where people buy and sell shares. It’s technically open to anyone; you don’t need to be a pro to buy shares from the stock market. The actual places that monitor the buying & selling are referred to as the stock-exchange. You may have heard of the New York Stock Exchange or the FTSE 100 - there are a few of them. Companies list shares on an exchange through a process called an initial public offering (IPO). For example, if a company is based in the U.S. it would likely list its offering on the New York Stock Exchange, but in the U.K it could be the FTSE 100. Investors can then buy and sell these stocks among themselves, and the exchange tracks the supply and demand of each listed stock which helps set the price for each share!
You’ll often hear phrases like “the stock market closed at XX today” or “the New York stock exchange is opening up at xx today”. That’s because they run each day with an opening & closing time for when trading takes place.
In investing terms, an asset is something that holds economic value. You could own a share of a company and that would be known as an asset. Same goes for a house or a piece of art that is expected to provide a financial benefit to you in the future. Assets are thought of as something that, in the future, can generate cash flow.
You’ve bought a piece of a company, called a share. When the company makes a profit in a given year it pays out dividends to everyone who has a share in it - technically to its owners! Dividends are payments given as a reward to investors for putting their money into the company. The more shares you have, the higher the dividend amount you get back. Not all companies have dividends, though! And not all companies that have dividends are good companies to own.
Bonds are like a loan between the lender (you) and the borrower. Think of it as an I.O.U. You lend the money and the borrower agrees to pay you back at a certain point in time, plus interest.
There are generally 4 different types of bonds you can buy:
- Corporate bonds - issued by companies who would rather not get a bank loan as they charge higher interest rates and give not so great terms.
- Municipal bonds - issued by states in the U.S. and municipalities. Some of these bonds actually issue tax-free coupon income for investors. You’ve got to pay taxes on income earned from investments, so this can be a big money saver!
- Government bonds - those issued by governments to help pay for roads, schools and services. They can also be referred to as sovereign debt.
- Agency bonds - issued by companies linked to the government.
Investing in bonds can help to balance out your portfolio as they are less risky. They are seen as a less volatile investment so a great way to diversify and help manage the risk of losing money. Often when you are closer to retirement age you can move things around in your portfolio so you have more in bonds than stocks - to help keep that money more secure. When you're young, you have time to ride out the ups & downs!
- Index Funds
These are a mix of stocks and bonds together in one ‘fund’. The fund then tracks an index, such as the S&P 500 index (more below!) that mimics the performance of a financial market.
Steps to investing in index funds:
- Pick the index that you want to track. This could be large U.S stocks like the S&P 500, or the lesser known small U.S stock indexes such as the Russell 2000.
- Choose a fund that tracks your selected index.
- Buy shares of that index fund.
Index funds are often touted as a good place for newbie investors to start because they enable broad diversification by nature of it being a mix of stocks and bonds.
- Exchange-Traded Funds (ETFs)
An ETF can be made up of stocks, bonds and commodities. You can put money into an ETF fund and that ETF could track an index, sector, or commodity. For example, you can put money into an ETF that is made up of shares in the renewable energy sector or in companies that have a higher % of women on the board of Directors.
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- Dollar Cost Averaging
In simple terms, it’s an investment strategy. You invest regularly over a period of time, regardless of how the market is performing. You don’t watch for ups & downs, you stay focused and keep going. This strategy removes the complicated work of attempting to time the market in order to make purchases at the best prices. In all honesty, this is almost impossible to do as no one can really predict the future. Not even that guy in the suit telling you that he can.
This strategy of dollar cost averaging can be applied when you invest in ETFs or index funds, as well as other stocks or shares.
- S&P 500 Index
Or otherwise known as the standard and poor’s 500 Index. The S&P 500 Index is a stock index (tracks the performance of companies and gives an indicator of the performance of the overall market). It’s made up of the largest 500 companies in the U.S. For example, Apple, Amazon, Tesla, and Johnson & Johnson are included in this list. You can invest in many, many different types of funds that each track the performance of the 500 largest U.S. companies via the S&P 500 index.
Investing in a fund that tracks the S&P 500 is often seen as a great way to diversify and manage risk since you are not holding hope for one company to make it big for you.
- Price Earning Ratio (P/E)
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. It’s a good figure to look at when trying to figure out the value of a company’s shares before you invest.
P/E Ratio = Earnings per share / Market per share
And there you have it! There are plenty more investment terms but pat yourself on the back for learning these!