21 Things All Novice Investors Wish They Knew About Investing
When it comes to the trepidations of novice stock investors, Mark Twain perhaps said it best:
"October. This is one of the peculiarly dangerous months to speculate in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February."
More importantly, the following list encompasses basic concepts that even many sophisticated, experienced stock investors have either forgotten, thought they knew, or never knew to begin with. Although hardly a comprehensive list, I chose crucial terms that, according to my experience, are neglected or misunderstood, but nonetheless form the basis of sound stock investing knowledge:
1. The ease with which you can buy or sell shares is called market liquidity.
2. Volume is how many shares are traded over a given period of time. The higher the volume, the greater the liquidity.
3. Companies often launch stock splits to boost liquidity.
4. The larger markets have market makers, who buy and sell to keep trading liquid.
5. The ask is the amount a market maker will sell to you for.
6. The bid is the amount a market maker will buy from you for.
7. The spread is the difference between the ask and the bid prices, and it's how the market maker profits.
8. A dividend is a return of money to shareholders. Dividends are taxed at a lower rate than other gains.
9. The dividend yield is the percentage of invested money that will be returned to the investor every year in dividends.
10. Ex-dividend date is the date at which you must own the stock, to get the next dividend.
11. Payout ratio is the percentage of cash flow or earnings that a dividend will consume.
12. To get its stock listed on the New York Stock Exchange (NYSE), a company's earnings must be more than $5 million a year and have more than 2 million shares to trade.
13. Stock shares are often categorized into certain groups, typically known as Class A and Class B stock. They're usually identical, except the holders exercise different voting rights.
14. Preferred shares largely lack voting rights, but holders get their dividend first. If the dividend is missed, it must be paid in full before common stock receives its dividend.
15. Market cap is a company's worth if purchased completely from outstanding shares. The formula to determine market cap: share price times outstanding shares.
16. Fundamental traders and analysts subscribe to the investing philosophy that a stock price's worth is tied to the underlying metrics of the company, the company's sector, and the broader economy.
17. Technical traders and analysts act according to the theory that everything you need to know about a particular stock is priced into that stock, and the vicissitudes of the price are more revealing about the future price than the underlying business and economic fundamentals. (Smart investors are non-dogmatic about these two schools of thought and blend the two philosophies into a hybrid one.)
18. Resistance is the price point that appears to impede the rise of a stock price.
19. Support is a price point that appears to halt a stock price's decline.
20. Exchange-traded funds (ETFs) are baskets of stocks, representing a variety of securities, that you can buy and sell on common exchanges.
21. A stop-loss order is a mechanism an investor puts in place to automatically sell a stock when the price drops too low (or moves too high if short selling).
Need to brush up on the basics some more? For a more comprehensive lesson on Investing 101, check out our tutorial: Investing Basics for the New Investor.