*Disclaimer: This article is for entertainment purposes and should not solely be used to invest in the markets or otherwise. None of the advice given should be taken without the advice of a professional money manager reviewing your investments
If you have not read my previous articles I highly suggest you look into it as soon as possible because this portion might not make any sense. I will try to navigate through the most common terms in investor lingo and some common tools in the following posts. Shall we?
Side Note: I have heard a lot lately on GameStop (GME) stock and want to clear the room for this and any other trending stock on Reddit. Be very cautious, because, while it might seem like an easy buck it really is not. There is a high degree of volatility that can cause the stock to crash right now. Two weeks ago, GameStop was trading at under 40$ and now it is hovering around 225$.
If that even went back to 60$ you would lose 165$/share. It is not worth it in my honest opinion. The old saying goes, “If your neighbor is telling you about a stock it is no longer worth it”.
Stocks can trade on one exchange or they can trade on multiple exchanges. Your brokerage usually can buy from the three large exchanges in America but outside the U.S. there is hundreds of other exchanges and sometimes, stocks in U.S. exchanges, trade on foreign exchanges. This means that on the weekend you could see your stock drop in price a bit before market opens and you can do pretty much nothing about it, unless you have a brokerage set up that way. Either way, for the most part I don’t see major shifts in stock prices in other exchanges unless the stock is valued low(penny stocks).
Indexes are representations of the stock market in a way. These indexes usually represent the best options that those particular indexes have chosen to include in their group of stocks. S&P 500(Standard and Poor 500), RUSSELL 2000, DJIA(Dow Jones Industrial) and other Indexes all have different stocks grouped inside them. As the names indicate for some of them, for instance Russell 2000, there would be 2000 stocks in that index. There is also quite a few small indexes or sector related indexes but they are not as big of a representation as the major indexes.
A ticker symbol is the symbol you can search a stock by, for instance AAL is American Airlines or WAL is Walmart or MSFT is Microsoft or KO is Coca Cola etc. On some brokerage sites you have to search the ticker symbol while most only rely on the company name. Ticker symbols aren’t a big deal but if you here that name just think of a business.
Futures are contracts that are paid for in the future for a set upon price. A lot of people use Futures as speculative as to how the markets will open up in the morning because they trade on the weekend and before the markets open. Futures are a sign of what is to come because they show buyers attitudes before the market opens up.
Sectors and Industries
Sectors are general groups that stocks fit in while industries are very specific areas of a certain sector. Think of it as a state and a city. The states have a lot going on in them but cities generally have only a couple major things happening in them unless they are a big enough entity. Same thing for stocks, you might know that the energy sector is not doing good, however, the green energy sector is doing great.
Penny stocks are not get rich schemes nor are they the worst stocks in the world. They just simply are stocks valued at under 5$. There is special rules to penny stocks as a huge amount of them are Over The Counter(OTC) traded stocks, meaning they have to be physically traded in at some point. For this reason, most brokerages will not let you short them(because it requires buying them) nor would I suggest that. If you short a stock that is 2$ and you borrow $1,000 shares to short you put yourself at risk. If that stock later on becomes worth 20$ later in the week you will owe the brokerage 20,000$. Another problem with penny stocks is that they are unpredictably volatile. If they are worth 3$ and go down in price to 1.5$ you lose half your value in shares. Also, because these stocks are OTC, your brokerage will not allow you to borrow on margin because either 1.)it would be risky or 2.) it would cost too much.
Margin accounts allow you to leverage more money by borrowing you up to 2x your current cash and sweeping vehicles if trading stock and over 7x your cash and sweeping vehicles if trading currency (that’s bananas). Margin investing accounts are pretty much only built for swing or day traders because any margin borrowed has a percentage to be paid on it. Think about it as a lower percentage loan from a brokerage. If you have a margin account, two things are true. 1.) You must have 2,000$ of cash and sweeping vehicles 2.) You have a non-cash accounts. Non-cash accounts are pretty cool because they let you withdraw your cash immediately after sale of stock but they are not so cool because you have to wait for the cash to settle if you want to re-invest, you must wait for your deposits to settle to invest and you cannot borrow on margin. If you lose all of your original investment on margin you will get what is called a margin call where you will have all your current stocks sold or required to deposit money. That seems like a scary time. Crazy story, once when investing through Robinhood I had 25,000$ account and a glitch in the system registered that I had a margin call while I was at work. I’ve never been so scared but dang, Robinhood doing my dirty again.
ETF’s and Mutual Funds
Think of an ETF (Exchange Traded Fund) as a pool of stocks that allow you to invest in one sector or area of the market whereas a Mutual Fund is a group of stocks that other investors pull together to invest in a pool of stocks that could be of wide ranges. ETF’s and mutual funds give you the ability to reduce your risk to market downsides as opposed to buying single stocks because instead of being exposed to a specific companies downfall you would take on a lesser risk. ETF’s can be leveraged(meaning they go up or down 2x as much when a sector goes up) inversed(meaning they follow groups oppositely. EX: gold goes up inverse goes down) and there is plenty of options out there. Word to the wise, do not buy leveraged ETF’s long term, not only do they usually degrade over time they also are extremely risky and can be decommissioned.
Let’s take a break for today and come back tomorrow(these hands be tired). This will give you time to digest and learn these terms. Over time it will be natural but fully understanding them now will let you really submerge yourself to the market before you even put a dime in. See you tomorrow! If you have any comments or concerns you can contact me at firstname.lastname@example.org.