[FAQ] Investing [101]

Posted May 21, 2020 01:37 AM

So you want to understand how investing works and maybe make a little money doing so? This thread will tell you the absolute essentials on Investing and how to do so wisely. I hope you enjoy this thread. The more you learn, the more you earn. This concept doesn’t only apply to academia. As you are reading this thread you should realize, you’re making your first successful investment. You’re taking the time to learn what you need to know in order wisely invest. I made this thread to inform users who are new to investing, or are maybe a bit dusty. If you're well rounded and got something from this thread, great, i'm glad you could get something out of this. This won't tell you how do to anything. This thread should open doors which should take you to the next level.

Investment – The action or process of investing money for profit or material result.
Risk – to expose (someone or something valued) to danger, harm, or loss.
Money – A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.

"An investment in knowledge pays the best interest." - Benjamin Franklin

The stock market is definied as a market in which shares of publicaly held companies are issued and traded either through exchanges or over-the-counter markets. There are many markets across the world trading many companies. Another name for the stock market is the equity market. I will be listing key terms that are essential if you want to trade stocks and actually know what's happening.

Stock Broker - A stock broker is an institution or individual who or which executes buy or sell orders on behalf of a customer.
Shares – Shares are ownership of a company that is held and traded. Shares can be publicly and privately bought and sold, depending on the company.
Quarter/Quarterly – Quarters are events that happen every quarter of a year. Around these times, reports are publicly shared to the public and share-holders. Prices can fluctuate based on company performances.
Dividends – Dividends are percentages paid back to share-holders every set period of time (that’s agreed). The determined amount is usually a certain percentage back of every share held.
Capital Gains – Capital gains is any profit made from the stock market.
Selling Short - Also known as short selling, this is when an investor or speculator borrows shares of stock or another asset he or she doesn't own, sells it, pockets the money with the promise to replace the property someday, and hopes the asset declines in price so it can be repurchased at a lower cost, the differential becoming the profit.
Margin - Brokers will often lend customers money against the value of certain stocks, bonds, and other securities within their custody account if the client agrees to pledge the entire account balance as collateral as well as provide a personal guarantee.
Dow Jones (Industrial Average) – The Dow Jones is the average index of the top 30 companies in the market place. This average can be of great use for analysts and its listed anywhere you see stats in the marketplace.
S&P 500 – The S&P is short for “Standard & Poor’s 500”. The S&P is an index for the 500 largest companies listed on the NYSE. The NYSE is short for “New York Stock Exchange”. One of the biggest stock exchanges.
NASDAQ - The NASDAQ is an American marketplace. It happens to be the 2nd biggest in the world following the NYSE.
Board of Directors - A company's board of directors is elected by the stockholders to watch out for their interests, hire and fire the CEO, set the official dividend payout policy, and consider recommending or voting against proposed mergers.
Enterprise Value - Enterprise value refers to the total cost of acquiring all of a company's stock and debt.
Market Capitalization - Market capitalization refers to the value of all outstanding shares of a company's stock if you could buy them at the current stock price.
Income Statement - An income statement shows a company's revenues, expenses, taxes, and net income.
Balance Sheet - A balance sheet shows a company's assets, liabilities, andshareholders' equity.
Form 10-K - An annual disclosure document certain firms are required to file with the SEC, it contains in-depth information about a business including its finances, business model, and much more.
SEC - The U.S. Securities and Exchange Commission is an agency of the United States federal government. It holds primary responsibility for enforcing the federal securities laws, proposing securities rules

The OTC market is a decentralized market that doesn’t have a central physical location (unlike the Stock Market). Bonds, currencies, and derivatives are all traded on the OTC market. The OTC market can have conservative and unaware investors feeling doubt and skepticism but understand, the OTC is very real and very legitimate. You can just as easily make/loose money on the OTC markets as you can in the regular Stock Market.

Things you should understand:
• The stocks vary on pricing and stability. You can make very safe and very risky bets in the stock market.
• Generally speaking, you need a broker to make trades on the stock market. In this day and age, apps are replacing the brokers jobs (lowering trading fees significantly).
• Only invest what you can afford to lose.
• The NYSE is NOT open 24/7, it’s open 5 days a week under limited hours.

Forex is short for Foreign Exchange market. The Forex market is a decentralized one like the OTC market and is a very popular choice of investment by many. The concept of Forex is simple. You exchange one currency for another one. Bets are/can be leveraged and timed. Forex markets are open 24 hours a day, 5 days a week. The daily average trading volume is around $5 trillion.

Leverage/Margin – All trades are performed using borrowed money. With this rule, you are given the privilege of leveraging a trade.

Binary options have never really been my cup of tea personally. Binary options are un unregulated investment that is/can be prone to scam websites. With that being said, binary options is a very real/legitimate thing. Binary options are bets placed on commodities within a certain time frame. Here’s an example below:
“Will the price of silver be above $874 by 2:45 today?” Like the Forex market, you can buy or short a trade. This form of investment is very high risk but potentially very rewarding.

A hedge fund is a limited partnership of investors that use high risk methods (like investing with borrowed money) in hopes of making large capital gains. Hedge Funds are known to be for the elite and are also known to be extremely successful. That is just one side of things, The higher you climb, the harder you fall. There are hedge funds that have lost tens of billions in the past with investors losing nearly everything. Hedge Funds are great overall imho.

Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. (Southwest Airlines bought a huge gas contract in the 90's and that paid off big time. They made/saved billions and billions of dollars.)

Roth IRA - A Roth IRA - IRA stands for individual retirement account - is a special type of account designation put on a custody account that gives it some incredible tax benefits, while simultaneously restricting the amount you can contribute to it and the types of investments you can hold within it unless you want to face some fairly draconian consequences. Money contributed to a Roth IRA comes from after-tax dollars, meaning you don't get a tax deduction for it, but, as long as you follow the rules, under the current system, you would never pay a penny in taxes on any of the profits you generated from the investments held within the Roth IRA, nor when you went to withdrawal those profits, for the rest of your life.
Traditional IRA - A Traditional IRA is the earliest type of IRA. Investors can contribute money to it if they qualify based on the income limitations and pay no taxes on certain types of investment gains held within the account until they withdrawal it at 59.5 years old or are forced to at 70.5 years old.
401(k) - A special type of retirement plan offered by employers to their employees, a 401(k) usually allows investors to put their money to work in mutual funds orstable value funds. Like a Traditional IRA, the investor usually gets a tax deduction at the time the account is funded, there are annual limits (albeit much higher than those on a Traditional IRA or Roth IRA), employers often match contributions (e.g., 50% match on the first 6%), and there are no taxes owed until you begin withdrawing the money (59.5 years old at the earliest but required distributions begin at 70.5 years old)
403(b) - A retirement plan that is much like a 401(k) only offered in the non-profit sector.
Rollover IRA - When an employee leaves his or her employer, he or she can opt to rollover the 401(k) balance and have it deposited into a Rollover IRA, which otherwise behaves almost exactly like a Traditional IRA.
SIMPLE IRA - A type of IRA for small business owners with fewer than 100 employees who want to offer some sort of retirement benefits to their employees but don't want to deal with the complexity that comes from a 401(k).
SEP-IRA - Short for Simplified Employee Pension Individual Retirement Account, a SEP-IRA can be used by self-employed people and small business owners under certain circumstances, allowing them to put aside substantially more money than they otherwise would have been able to invest due to much higher contribution limits calculated as a percentage of income.

I will be listing some terms I believe every investor should know. This section of the thread will likely be placed at the bottom, so if at any time you do not know what a word means, refer here. If the desired word isn’t here, Google is your best bet.

Stocks – A stock is a share of ownership within a company. A person who owns a stock is technically considered to be a shareholder, although that term is usually reserved for those who own majority shares. Stocks/Shares are something that can be bought in the stock market but not all companies are publicly traded.
Mutual Fund – A mutual fund is a type of investment fund that is popular in lots of financial firms. Generally, a pool of money is gathered from investors and that money is then used in a wide range of industries. This significantly reduces risk with investments and can be a great form of long term investing. (side note) I personally have a few friends whose parents funded their kids’ college tuition through mutual funds (18 years of long term investing pays off).
Expense Ratio – An expense ratio is the fee that goes to managers of a mutual fund. This fee is generally measured in terms of percentages (of invested money).
Bonds – Bonds are an interesting form of investment. You, the investor agrees to pay a company of government a certain amount of money. In return, you are promised a certain amount of money back within a certain time frame. Generally, the longer the wait, the more that’s returned to you. This is considered to be a very easy and safe form of investing (considered a company doesn’t go bankrupt or a government doesn’t either cough Greece *cough*)
Asset Allocation – Don’t let the investment jargon fool you, this simply means an investment strategy.
ETFs – An ETF is an “exchange traded fund”. They’re usually mutual funds that trade throughout the day on stock exchanges (as if they were stocks). ETFs are known to have tax advantages.
Trust Fund – A trust fund is a legal fund protects assets and in unique ways could used for tax benefits if formed properly. Trust funds are known to protect assets and in modern culture is known to hold assets for the rich and developing.
REITs – REITs are short for Real Estate Investment Trusts. This is another means of a trust only through real estate. There are solid tax breaks with REITs.
MLPs – Not many people know about MLPs. They’re Master Limited Partnerships which are formed for you guessed it, tax reasons.
Investment Mandate – An investment mandate is a set of guidelines, rules, and objective used to manage a specific portfolio or pool of capital.
Custody Account - A custody account is an account that an institutional custodian operates on behalf of an investor to hold the investor's portfolio of securities.
Asset Management Company - An asset management company is a business that actually invests capital on behalf of clients, shareholders, or partners.
Registered Investment Advisor - An RIA is a firm that is engaged, for compensation, in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.
Fiduciary Duty - In the American legal system, a fiduciary duty is the highest duty owed to another person.
Fiduciary – Involving trust, especially with regard to the relationship between a trustee and a beneficiary.

The information I’m sharing today is public and could be accessed if searched. A lot of information here is compiled by me, just fairly stating so.
There are many different types of stock charts that display various types of information, however all stock charts display price and volume. On this stock chart, the blue and magenta colored marks represent the price history. The amount of trading history each bar represents is based on the period of a chart. For example, on a daily stock chart, each price bar represents the prices the stock traded during that day. On a weekly stock chart, each price bar represents the prices the stock traded during that week.
The length of each vertical bar illustrates a stock’s high-low price range. The top of the bar corresponds to the highest price paid for the stock during that period, and the bottom of the bar corresponds to the lowest price paid. The small intersecting horizontal slash indicates the current price or where a stock closed at the end of the period. The price bar will be presented in blue if the price of the most recent trade is equal to or greater than the previous period’s last price, or magenta, if it is less than the previous period’s price close.
The vertical lines displayed at the bottom of the chart represent the number of shares traded during the specific time period of the chart. The length of the volume bar indicates a value that corresponds to the scale at its right. The color of a volume bar is determined by its corresponding price bar; blue if the most recent trade is equal to or greater than the previous period’s last trade, and magenta if it is less than the previous period’s closing price.

Spoiler (Click to View)

Moving averages are plotted on stock charts to help smooth out volatility and point out the direction a stock may be trending. It may also help provide context for the price or volume movements during a given period as it makes it easier to spot divergences from an established price trend.
The red line cutting through the price bars is the 50-day moving average. It represents the average price over the previous 50 trading sessions and is calculated by summing the closing price over the last 50 trading sessions and dividing by 50. The black line is the 200-day moving average. It represents the average price over the previous 200 trading sessions and is calculated by summing the closing price over the last 200 trading sessions and dividing by 200.

Most growth investors like to see moving averages trending up and they like to see the stock’s current price continually close above the trailing average. This is a sign the stock is on the right track to continue rising in price. Value investors, on the other hand, might pick stocks that are currently trading below a moving average, in order to pick a stock that is trading “at a discount” with the hopes the stock will quickly return to its “average” price.
The red line cutting through the volume bars is also a 50-day moving average, but this one is an indication of the average number of shares traded over the last 50 trading sessions. When viewing a daily chart, this line represents a 50-day moving average volume level. This line is derived by summing the volume of the last 50 trading days and dividing it by 50. Whether or not volume is above or below the average for a certain period could have a significant impact on your stock chart analysis. For example, above average volume on a daily stock chart can confirm or amplify the significance of a price move. When volume is below average, it becomes questionable whether prices will continue in that direction.

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