Dylan Lewis: Hey, there! I'm Dylan Lewis from The Motley Fool. In this FAQ, we're going
to talk about how to get started investing in stocks.
To invest in stocks, you'll need to three things: a brokerage account, a long-term focus
and money you won't need for the next three to five years, and a willingness to keep it simple.
Before we get too deep, let's start with the basics.
A stock represents a piece of ownership in a company, or a share. Owning a share of
a company gives you certain rights. The rights can differ depending on the type of stock
you own, but the most important takeaway is that by owning stock in a company, you're
a part owner in that business. And being a part owner means that you have a stake in
the money the business earns now and the company's future so long as you continue to own your shares.
When you hear "the stock market," it's often referring to the S&P 500, which
is an index comprised of the 500 largest publicly traded companies on the U.S. stock market.
You can think of it as a gauge for how all stocks are generally doing. Now, you'll see
headlines every day -- some on fool.com -- that talk about what's going on in the market.
Headlines like "Disney Is Up 4% After Disney+ Announcement" or "The S&P Slumped Today On
Growing Trade War Concerns." Going back to what I said earlier, owning shares in a business
entitles you to a sliver of the company's current and future profits. The company's
ability to generate cash consistently over time is the single largest driver of its ability
to grow in value and for shareholders to enjoy their stock being worth more money. The public
gets updates on how businesses are doing quarterly when they file their financial paperwork with
the Securities and Exchange Commission. But the stock market is open Monday through Friday,
9:30am to 4pm, and you could sit and stare at a screen and watch stocks go up and down
all day if you wanted to. Now, I just told you, the thing that actually
makes a business worth more is only released every three months. So why do stocks move
daily, hourly, or even minutely? The market is full of different people with different
approaches, strategies, and long-term goals. Based on those, they'll constantly be interpreting
the elements of a business -- things like the success of a new product, tweets from
an executive -- and try to parse how those may impact a company's long-term results.
Others will try and buy and sell in seconds, pocketing pennies hundreds or thousands of
times a day. Few people consistently find success with that because it's a lot closer
to speculating than really investing. For the longest time, fees were an inevitable
part of buying stocks. You would submit an order and your broker would collect $7 or $10
to make that order happen. It doesn't sound like much, but it made things prohibitively
expensive for new folks to get started. Think about it. Paying $7 to buy and sell $100 worth
of stock would mean that you need to earn 14% on your investment just to break even
over the fees that you were paying. Thankfully, now we are truly living in the golden age
of investing for individuals. There are tons of commission-free brokers out there where
you can create an account and buy and sell stocks for free. The collapse of commissions
has made it easier than ever to get started with $50 or $100.
Now, most new folks will start out with commission-free brokerages like Robinhood or E-Trade. Each
brokerage has its pros and cons. The no-fee brokers cost less, but generally have more
limited offerings and less information available to newbies. Check out the link in the video
description for our broker center, where we explain the pros and cons of most major brokerage accounts.
Now, once you've decided on a brokerage,
you just need to transfer money in and you can get started. We're going to talk about what
kind of things beginners should know. But first, a responsible money PSA. At The Fool,
we generally suggest that folks only invest money they won't need for the next three to
five years. Here's why. The stock market has historically returned 7% to 10% per year over
the long term, but that's an annualized number, or effectively an average. Some years, the
market's gone down; some years, it's up. Here's a look at how the market has performed over
the past five years, including dividends. Returns range from negative 4% to almost 22%
on a yearly basis, but annualized, the market returned 9.3%, showing just how important
it is to maintain a long-term approach and keep the money you've invested in the market.
That's why it's important to only invest money you won't need in the next few years.
You don't want to be in a position where you have to sell stocks at a loss during a dip because
you need the money now. OK, with that out of the way, you've got your
money burning a hole in your brokerage account. What do you do with it? For a true beginner,
it's often best to start with index funds. Remember how I said the S&P was an index that
represented the U.S. stock market? Well, you can buy shares in a fund that tracks that index.
It's one of the easiest ways for new people to start out because you're instantly
diversified, owning a tiny sliver of 500 companies at once. If you're interested in going that route,
Vanguard, Fidelity, and major firms have an S&P 500 index that you can buy,
and boom, you're all set. Some people will want more, though.
They want to buy individual stocks, so let's dig into that. There are literally thousands of publicly
traded companies. We're going to walk through a couple different ways that you can categorize them.
First up, big companies versus small companies.
One of the most common ways to segment companies is by market capitalization. That's a fancy
way of saying business value. You'll typically see companies broken up into four or so market cap groups:
• large-cap -- companies that are worth more than $10 billion, like McDonald's and Microsoft
• mid-cap -- companies worth $2 billion to $10 billion • small-cap -- companies worth $250 million to $2 billion
• micro-cap -- companies worth less than $250 million.
Each category has its own pros and cons. Large-cap companies are far more stable, but they're
also bigger, which means it's harder for them to meaningfully grow. After all, a $1 trillion
company doesn't exactly double overnight. Mid-cap, small-cap, and micro-caps are generally
less proven businesses, but if they can become the leaders in their industry, they could
grow to large-cap companies, making individuals who bought shares early a lot of money in
the process. For new investors, we generally suggest you
stay away from micro-cap businesses. They're often unproven and less followed. Now, some
are totally legitimate businesses that are just in their very early innings, but because
the space is less followed, it's also ripe for fraud and financial manipulation.
One of the other ways you can split things up is dividend stocks versus growth stocks.
A lot of new investors are often drawn to dividend stocks. These are mature companies
like Verizon that pay their shareholders a specified amount every month or quarter as
a way to share profits from the company. On the other hand is growth stocks.
These are businesses that are generally younger, are growing revenue very quickly, and are more
focused on building out their business instead of making it immediately profitable. Dividend
stocks tend to offer stability and income and reward their shareholders with dividend
payments and modest growth in share price. Growth stocks are less certain, but can offer
big return potential for investors. Putting this section together with the last one, dividend
payers are often mid-cap and large-cap companies, while growth stocks tend to be small-cap and
mid-cap companies, but there are definitely exceptions.
Now, I could spend all day on the types of stocks you could buy, but I also want to give
a few quick rules to keep you out of trouble with your first couple stock purchases. Here's
a quick checklist of things to keep in mind. Is it a penny stock? Investors should stay
away from micro-cap stocks, particularly ones worth less than $100 million. Below this figure,
you start to get into the fringes of the financial markets, and with less coverage, there's more
room for shady stuff. Second, do you understand what the business does and how it makes money?
The great investor Peter Lynch has a quote: "Never invest in any idea you can illustrate
with a crayon." What he means is that before you buy a stock, you should be able to explain
how the company makes money. If you can't, how are you going to be able to tell when
things aren't going according to plan? One of the first stocks I bought was Apple.
I was still figuring out how to read financial statements, but I understood that Apple made
most of its money by selling iPhones. I had an iPhone and it seemed like all of my friends
had an iPhone. Even though I was still learning about things like gross margins and EBITDA,
it was clear the company had an undeniably successful product, and I was in a position
to witness the market-leading position and whether or not it changed. Start out by thinking
about companies whose products you interact with often and like -- maybe a video game
you can't put down, or a software use at work. You have a leg up here because you already
have a feel for the business, and you just need to learn how to navigate their financials.
If you're looking for some good entry-level investing content, we've got a starter kit
available at fool.com/start. It walks you through all things investing, from saving
money to buying your first stock, and it has a five-stock sampler to get you started.
And if you liked this video, please let us know by giving a thumbs up and subscribing to our channel.
It helps more people find us and it makes me and my boss very happy.
Thank you for tuning in! If you have any questions, drop those down in the comments section.
Until next time, Fool on!