Buying Stocks 101

For the novice investor, picking individual stocks and bonds can seem like an overwhelming endeavor.  Most people shudder at the thought of putting so many eggs into once basket, and rightly so.  Fortunately for them, the market has invented several vehicles which shelter the investor from the risks of buying stocks individually, and also provide a measure of professional management to a stock portfolio which would be difficult for an individual to achieve alone.  Collectively, these investment vehicles are called funds, and they come in several types to address specific investor needs.  We will explore some of them below.

Mutual Funds

The first type of fund we will discuss are Mutual Funds.  These are by far the most common type of fund traded these days, and they form the bulk of most people’s 401Ks.  A mutual fund is essentially a collection of securities purchased with a pool of investor money, with those securities chosen because of some strategy for growth defined by the fund manager.  So what benefit does a mutual fund provide as opposed to buying stocks individually, you might ask.  Simply, they spread the risk around.  Instead of buying one hot stock in the tech sector, you might hold a fund which itself holds scores of positions in various tech companies.  You also get the benefit of a professional fund manager, who undoubtadly is able to react to news affecting those stocks much quicker that you yourself can.  While you may not have the dramatic growth of a rocketing IPO, you also tend to avoid the crashes that come more often.  The mutual fund investor is usually looking to do two things: simplify and diversify.

ETFs (Exchange-Traded Funds)

Exchange-Traded Funds, or ETFs as they are commonly called, are a special type of fund created to mirror the major market indexes, such as the S&P 500 for the Dow Jones Industrial Index.  The idea here is that these funds would hold the same stocks as are in their corresponding index, making it easy to keep up with broad movements in the market and offering diversity over larger sectors of the market.  Some differences between ETFs and Mutual Funds are that there isn’t a minimum investment as there is with a mutual fund.  Also, you will always pay a commission on an exchange-traded fund, whereas you will only pay a commission on a mutual fund if it carries a “load”.  Another key difference is that while you cannot buy and sell options in a mutual fund, you can in an ETF.  For more on options, look here.  An ETF has several attractive features that some investors love such as lower capital gains taxes, generally low fees, and the ability to buy and sell them throughout the day.

Hedge Funds

A lot of media attention has been given to Hedge Funds lately, primarily due to their role in the financial crisis, but still many investors aren’t sure what they are or why one might invest in them.  A Hedge Fund is essentially a private partnership that operates with very little regulation from the SEC (which you can bet will be changing in the near future) which invests in a large number of varying assets applying unique and varied investment strategies in order to hedge against risk and in doing so increase the return to levels above normal investments, such as mutual funds.  To break it down further, Hedge Fund managers try to reduce risk and increase return by leveraging low risk investments against high return investments, or vice versa.  Generally, Hedge Funds require a long-term investment, maybe two years or more.  And they use aggressive investments strategies in order to reduce risk and increase return, which itself is risky.  They are an option for the investor looking to beat average markets return rates, but they should not be considered with without much research and vetting.

REITs (Real Estate Investment Trusts)

REITs are a little bit different.  We’re not buying stocks here.  In fact, they aren’t even technically a fund.  Real Estate Investment Trusts, or REITs, are actually corporations that hold properties or real estate related assets.  A REIT could hold hotels, shopping malls, office buildings, undeveloped land, or even commercial mortgages.    REITs are obligated to distribute 90% of the income from property holding to shareholders in the form of dividends on an annual basis.  The main advantages of REITs are that they invest in revenue-generating properties or paper instead of corporations making them and ideal option for those looking for an alternative to the stock market, and that they diversify an individual’s investment over a large number of properties thereby blunting some of the risk of real estate holdings.

If you are looking for something other than simply buying stocks or holding cash in a C.D., one of these funds may be just what you need.

For the novice investor, stock tables can be intimidating.  You know they hold a lot of valuable information that can help you make a decision about a particular stock, but you may find it difficult to interpret the meaning of each number or why that number may be useful.  Here we hope to shed some light on some of the common types of data listed about a stock.

52-Week High

The 52-week high tells you the highest price a particular stock has sold for in the last 52 weeks.  You might want to look at this to determine where the stock is now in relation to where it was.  If it is at its all time high right now, think twice about sending a buy order.

52-Week Low

In contrast, the 52-week low gives you the lowest price that stock has sold for in the last 52 week period.  You may use this information to determine if the stock is bargain - or if it is tanking.

Name and Symbol

This one is obvious, but important.  The name of the company will be listed along with its ticker symbol.  That symbol will be your code to get information about the stock from numerous sources.  You’ll find it listed in the financial section of your newspaper.  You’ll use it when speaking with your broker.  You’ll type it into your favorite search engine to get last night’s close.  The stock’s symbol is your key.  Memorize it.

Dividend

A dividend is a payment made to owners of a stock.  Not all stocks pay dividends, so this is an important column to pay attention to.  The amount listed is the annual dividend as if you owned one share of that stock.

Volume

The volume number indicates how many shares of the stock in question were traded that day.  If this is your first time to look at a stocks table, the volume will not be very useful to you.  But over time, you will want to watch the volume to determine if the stock is tracking in higher or lower volumes than normal.  If, for instance, it is trading more heavily than normal, that may indicate concern among shareholders or an exciting announcement that may boost the companies profits.

Yield

The yield is simply the dividend divided by the stock price.  It is a percentage and calculated as if you were to buy stock that day.  This is of great importance to income investors.

P/E

The P/E value is an important one.  It is the ration between the stock price and the earnings of the company.  You would use this ratio to determine if the stock is a good value.  In a stock table, the P refers to Price or the cost of a single share of stock, while the E stands for Earnings or the companies reported earnings for the last four quarters.

Day last

Day last is simply the price at which the stock ended the day.  Additionally, there may be high or low values for the day in some publications.

Net Change

The difference between how the stock ended today versus how it ended yesterday is the net change.  You will use this to determine if it went up or down in the last trading session.

There may be other information listed along with these numbers, especially if you are viewing stock tables on the internet.

Stock tables are a vital tool to aid in your overall strategy for buying stocks.  It would benefit you to sit down with your morning newspaper or favorite finance website and go over the terms in this post while looking at the current days stock tables.