Stocks are fractional pieces of publicly traded companies. If you own a company’s stock, you own a piece of that company. Learn everything you need to know about these building blocks of investing.
Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.
Five Questions to Ask Before You Invest
Question 1: Is the seller licensed?
Research shows that con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims. Smart investors check the background of anyone promoting an investment opportunity, even before learning about opportunity itself.
- Researching brokers: Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website.
- Researching investment advisers: The Investment Adviser Public Disclosure website provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms.
- Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.
If you are not sure who to contact or have any questions regarding checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.
Question 2: Is the investment registered?
Any offer or sale of securities must be registered with the SEC or exempt from registration. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Smart investors always check whether an investment is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.
Question 3: How do the risks compare with the potential rewards?
The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes.
Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds.
Many investment frauds are pitched as high return opportunities with little or no risk. Ignore these so-called opportunities or, better yet, report them to the SEC.
Question 4: Do you understand the investment?
Many successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.
Question 5: Where can you turn for help?
Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ websites. If you have a question or concern about an investment, please contact the SEC, FINRA, or your state securities regulator for help.
What Is a Cyclical Stock?
A cyclical stock refers to an stocks whose price is affected by macroeconomic, systematic changes in the overall economy. Cyclical stocks are known for following the cycles of an economy through expansion, peak, recession, and recovery. Most cyclical stocks belong to companies that sell discretionary items consumers can afford to buy more of during a booming economy. These stocks are also from companies that consumers choose to spend less with and cut back on during a recession.
Understanding Cyclical Stocks
Companies whose stocks are cyclical include car manufacturers, airlines, furniture retailers, clothing stores, hotels, and restaurants. When the economy is doing well, people can afford to buy new cars, upgrade their homes, shop, and travel. When the economy does poorly, these discretionary expenses are some of the first things consumers cut. If a recession is severe enough, cyclical stocks can become completely worthless, and companies may go out of business.
Researching investments is part of an investor’s due diligence. Companies must provide certain information when they initially offer stocks or bonds for sale to the public. Companies and bond issuers must also must provide certain information to the public periodically. These disclosures provide investors with information to judge whether a particular security is a good investment. If a company is not registered with the SEC, or a bond issuer is not registered with the Municipal Securities Rulemaking Board (MSRB), it could be a red flag. Scams often involve unregistered companies.
How to Read a Mutual Fund Prospectus (Part 1 of 3: Investment Objective, Strategies, and Risks); (Part 2 of 3: Fee Table and Performance); (Part 3 of 3: Management, Shareholder Information, and Statement of Additional Information)
FINRA Fund Analyzer – The Fund Analyzer offers information and analysis on over 18,000 mutual funds, Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). This tool establishes the value of the funds and impact of fees and expenses on your investment and also allows you the ability to look up applicable fees and available discounts for funds.
Investing on Your Own
The first step to investing, especially investing on your own, is to make sure you have a financial plan. How much are you going to invest? For how long? What are your financial goals? Do you understand your tolerance for risk? All investments carry some risk.
The next step is research, research, research. When investing on your own, you are responsible for your decisions. How will you select one stock, bond, or mutual fund over others? Always make sure that all securities are registered with the SEC, using the SEC’s EDGAR database. Don’t purchase solely on stock tips from others.
What do you know about saving and investing? Do you want to see how your financial knowledge measures up against others? Try the Investor.gov quizzes.
Assessing Your Risk Tolerance
When it comes to investing, risk and reward go hand in hand. The phrase “no pain, no gain” – comes close to summing up the relationship between risk and reward. Don’t let anyone tell you otherwise: all investments involve some degree of risk. If you plan to buy securities – such as stocks, bonds, mutual funds, or ETFs – it’s important that you understand that you could lose some or all of the money you invest.
The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you may make more money by carefully investing in higher risk assets, such as stocks or bonds, than if limit yourself to less risky assets. On the other hand, lower risk cash investments may be appropriate for short-term financial goals.
An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to get potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain his or her original investment.
Many investment websites offer free online questionnaires to help you assess your risk tolerance. Some of the websites will even estimate asset allocations based on responses to the questionnaires. While the suggested asset allocations may be a useful starting point, keep in mind that the results may be biased towards financial products or services sold by companies or individuals sponsoring the websites.
A market index tracks the performance of a specific “basket” of stocks that represent a particular market or economic sector. U.S. examples include the Dow Jones Industrial Average, an index of 30 “blue chip” U.S. company stocks, the Standard and Poor’s 500 Index, and the Wilshire 5000 Index, which includes most publicly traded U.S. stocks.
What Is the S&P 500 Index?
The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities. Other common U.S. stock market benchmarks include the Dow Jones Industrial Average or Dow 30 and the Russell 2000 Index, which represents the small-cap index.
What Is a CUSIP Number?
If you’re looking for information on a stock or bond, you can try looking up the name of the security. Alternatively, you may try looking up the CUSIP number, a unique identifier. CUSIP stands for the Committee on Uniform Securities Identification Procedures. Formed in 1962, this committee developed a system that it implemented in 1967 to identify securities—specifically U.S. and Canadian registered stocks, U.S. government and municipal bonds, exchange-traded funds, and mutual funds.
What is a ticker symbol in the stock market?
A ticker symbol is an arrangement of characters—usually letters—representing particular securities listed on an exchange or otherwise traded publicly. When a company issues securities to the public marketplace, it selects an available ticker symbol for its securities that investors and traders use to transact orders.
Understanding Stock Tickers
A limited number of stocks appear on the stock ticker during any particular period, due to a large number of stocks trading at the same time. Often, the stocks with the greatest change in price from the previous day’s trading session, or those trading under the highest volume appear on the stock ticker.
You have probably seen a stock ticker scrolling by at the bottom of the financial news networks on television. The ticker provides current information for certain stocks, including the ticker symbol (the one-to four-letter code that represents a particular stock), quantity traded (volume for each transaction), price, a green “up” arrow if the price is higher than the previous day’s closing value, a red “down” arrow if the price is lower, and the net price change (either as a dollar amount or percentage) from the previous day’s close.
What is a Day Trader?
A day trader is a trader who executes a large volume of short and long trades to capitalize on intraday market price action. The price action is a result of temporary supply and demand inefficiencies caused due to purchases and sales of the asset.
- Day traders employ a wide variety of techniques in order to capitalize on market inefficiencies.
- Day trading can be a lucrative undertaking, but it also comes with a high degree of risk and uncertainty.
Day trading is the act of buying and selling a financial instrument within the same day or even multiple times over the course of a day. Taking advantage of small price moves can be a lucrative game—if it is played correctly. But it can be a dangerous game for newbies or anyone who doesn’t adhere to a well-thought-out strategy.
Not all brokers are suited for the high volume of trades made by day traders, however. But some brokers are designed with the day trader in mind. You can check out our list of the best brokers for day trading to see which brokers best accommodate those who would like to day trade.
Online brokers on our list, such as Tradestation, TD Ameritrade, and Interactive Brokers, have professional or advanced versions of their platforms that feature real-time streaming quotes, advanced charting tools, and the ability to enter and modify complex orders in quick succession.
Below, we’ll take a look at some general day trading principles and then move on to deciding when to buy and sell, common day trading strategies, basic charts and patterns, and how to limit losses.
In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency, and objectivity.
For every trading strategy one needs to define assets to trade, entry/exit points and money management rules. Bad money management can make a potentially profitable strategy unprofitable.
Trading strategies are based on fundamental or technical analysis, or both. They are usually verified by backtesting, where the process should follow the scientific method, and by forward testing (a.k.a. ‘paper trading’) where they are tested in a simulated trading environment.
Types of trading strategies
The term trading strategy can in brief be used by any fixed plan of trading a financial instrument, but the general use of the term is within computer assisted trading, where a trading strategy is implemented as computer program for automated trading. Technical strategies can be broadly divided into the mean-reversion and momentum groups.
- Long/short equity. A long short strategy consists of selecting a universe of equities and ranking them according to a combined alpha factor. Given the rankings we long the top percentile and short the bottom percentile of securities once every rebalancing period.
- Pairs trade. A pairs trading strategy consists of identifying similar pairs of stocks and taking a linear combination of their price so that the result is a stationary time-series. We can then compute z-scores for the stationary signal and trade on the spread assuming mean reversion: short the top asset and long the bottom asset.
- Swing trading strategy; Swing traders buy or sell as that price volatility sets in and trades are usually held for more than a day.
- Scalping (trading); Scalping is a method to making dozens or hundreds of trades per day, to get a small profit from each trade by exploiting the bid/ask spread.
- Day Trading; The Day trading is done by professional traders; the day trading is the method of buying or selling within the same day. Positions are closed out within the same day they are taken, and no position is held overnight.
- Trading the news; The news is an essential skill for astute portfolio management, and long term performance is the technique of making a profit by trading financial instruments (stock, currency…) just in time and in accordance to the occurrence of events.
- Trading Signals; Trading signal is simply a method to buy signals from signals provider, is a very effective strategy to determine the best time to buy or sell a stock or currency pair. Aggregate analysts forecasts are often used in momentum trading strategies.
- Social trading; using other peoples trading behaviour and activity to drive a trading strategy.
All these trading strategies are speculative. In the moral context speculative activities are considered negatively and to be avoided by each individual. who conversely should maintain a long term horizon avoiding any types of short term speculation.