Since 2016, the stock market has been steadily on the up and up. In January, the Dow hit more than 26,000 – which is the highest it’s ever been. You’ve seen the headlines. Now it's time to understand the basics of the stock market
Back up. What are some terms I should know?
Glad you asked. Here you go:
Bear Market: When prices dip it low, low, low. This is the opposite of a bull market.
Blue Chip Stocks: Think: blue gambling chips, the highest denomination chips used in casinos. These stocks from large companies that have a stable record of giving significant dividend payments.
Bull Market: A bull market is when a market is steadily increasing. Opposite of a bear market.
Day Trading: This means you're buying and selling within the same day before the close of the markets.
Dividend: This is a portion of a company’s earnings that is paid to shareholders, or people that own that company’s stock. Not all companies do this.
Dow: Also known as the Dow Jones Industrial Average. It takes the stock prices from 30 major companies and averages them into one number. People often use that number as a clue for how the stock market is doing.
Equity: Represents shares in the ownership of a company.
Portfolio: A collection of investments owned by an investor. You can have as little as one stock in a portfolio.
Stock broker: A person who buys or sells an investment for you in exchange for a fee (think: a commission).
Trading session: Exactly what it sounds like. It’s when trading is open for both sellers and buyers.
I've heard this is a bull market.
In the US, it has been going on a decade. Experts think it reflects that the economy is bouncing back from from the ‘07-’08 global financial crisis. And that consumers have high hopes for companies in the future. People are starting to have a little extra cash to spend, and demand for goods & services is high.
Some people think that the new corporate tax cut (thank the GOP tax plan) is a reason for the economy’s success.
Does a good stock market mean a good economy?
Well...not exactly. A strong economy is actually not a good way to predict how the stock market is doing. That’s because the stock market is like your friend that always does their own thing. But it’s worth noting that the stock market usually tops out well before the economy slips into a recession. Think: reaching the top of roller coaster and having nowhere to go but down. Which is making people think that we are headed towards a crash...but some experts think there’s no reason to believe it will be like the crash in 2008.
How is the market doing right now?
It depends on who you ask. Some experts think it might be getting overheated – pretty much how it sounds, when the market it getting too hot too quick. Some experts think it’s in a bubble – also how it sounds, when stock prices are above their value and could...pop. So, there’s reason to believe that we’re headed for some kind of market correction, since stocks can’t keep going up forever.
How do you actually buy stock?
Here are some tips for how to do it:
Go to a brokerage firm and open up an account. And no, you don't need to know someone on Wall Street. That's what places like Scottrade, E-trade, Charles Schwab, Vanguard, and Fidelity are here for. There are minimums for how much money you need to even open an account and start investing. With that in mind:
Full service...for high net worth clients. People who are in the market to put at least $25k...in the market.
Discount firms...for clients looking to put a lot less in the market. Think: a couple hundred or a couple thousand dollars. You pay less in fees – but you also get less in the way of investing advice.
Online trading...a low- or no-minimum route where you don’t even have to sit down with anybody to get going. Be aware of some restrictions and higher fees. You could also buy shares of a company directly from them. There’s a minimum too, usually in the $500 to $1000 range. You can go with what’s known as a robo advisor, an automated investing service that's one of the easiest and least expensive routes. Here are some options.
Do your research...
- Pick stocks in companies whose business model you understand. Invest in companies that have strong, trusted brands (or emerging ones).
- This is Warren Buffett’s favorite advice – brands are a business’s safety net. If a company makes a mistake, but people like the brand, they’re less likely to fall out of favor permanently. Aka: good for your stocks. But, be careful about believing hype. Pick companies that have a history of strong performance for investors.
- Look for companies that pay out dividends, which means money in your pockets, but they’re also good indicators of a company’s financial health.
- Check to see whether the company’s dividends increase over time. If so, their profits are too.
- Don’t forget to make a plan for selling your stocks. Have a set of criteria (think: if dividends are cut, if the price rises or falls past a certain point). This’ll help you avoid making decisions in the heat of a market downturn or upturn.
Buy some stocks. This will cost you more than just the cost of the stocks. You also pay commission every time you make a trade. This is where brokerage firms make most of their profits. That’s why it can be very expensive to trade constantly.
Then you wait. Most people buy stocks for the long term, a few years at least...the 5-10 year range is pretty normal.
Nobody knows what the future will hold. But the markets have been looking pretty good lately.