Investing 101

Before you invest your money, there are things you need to understand. For one, money invested is money at risk of being lost forever, or at the very least, being lost temporarily. 

For this reason, you need to make sure your financial house is in order first. If you are investing because you need to make a quick buck to get you out of a bad financial situation - DON"T DO IT. That's now how it works. That's how you get yourself into a WORSE financial situation.

If you are new to investing, or you are teaching your kids about financial literacy and investing, hooray for you! You are taking the right steps to change your life, as long as you take the steps in the right order.

Even if you know what you are doing, there are things you should to do to prepare yourself before you start buying stocks or investing.

 

First, you need to have a plan for what you are trying to accomplish, and you need to take care of some basic financial fundamentals.

Think about your financial goals for your life and seek to develop a comprehensive financial plan to guide you to them. A financial plan is your road map for how you want to accomplish your financial goals in the most efficient manner possible, taking into consideration your personal life story.

Before you start buying stocks, you need to develop a comprehensive financial plan, which includes an investment plan among other things.

Learn more about financial planning in this BLOG POST.

FINANCIAL PLANNING

Think about your financial goals for your life and seek to develop a comprehensive financial plan to guide you to them. A financial plan is your road map for how you want to accomplish your financial goals in the most efficient manner possible, taking into consideration your personal life story.

The profession of Financial Planning exists to help you to build that plan. A financial planner can help you decide when and if you should incorporate stocks into that plan. When you start to seek professional financial advice, it gets confusing quickly. You will see many different titles, financial planner, financial advisor and more. The differences are not well defined.

 

Generally speaking, a financial planner helps you build a road map or financial plan to help you meet your long-term goals. A financial advisor is someone who helps you with any number of investment types, and may or may not consider how that investment fits into your overall situation.

TO LEARN MORE ABOUT THE BASIC COMPONENTS OF A FINANCIAL PLAN,

READ OUR BLOG POST LINKED BELOW:

 

FINANCIAL PLANNING: THE THING YOU DO BEFORE YOU BUY STOCKS

COMPOUND INTEREST

NERD WORD ALERT

Compound Interest:  Earning interest on interest, over time.

“Compound Interest is The Most Powerful Force in The Universe.”

This famous quote from Albert Einstein speaks to the significance of compound interest as a financial concept. Those are strong words from someone who most people consider a credible source on math-type stuff.

Compound Interest is one of the most important financial concepts to understand. Once you understand what compound interest means, it can change your perspective on money and investing.

What is Compound Interest?

Interest: Money paid or received as compensation for depositing or loaning money.

Compound Interest: Earning interest on both your initial investment, but also your previously earned interest, over time. If an investment is left alone and continues to “compound” – it will earn a little more each year.

We have a blog post dedicated to compound interest here: Compound Interest: Taking Einstein for Granted.

You can also check out our Compound Interest Page for more, including a COMPOUND INTEREST CALCULATOR, an example, and links to download a spreadsheet with examples built in for you to use.

Intro To Stock Picking: Story, Numbers, Expectations

Anyone can pick a stock. A monkey with a newspaper and a dartboard can pick a stock, or so I’ve been told. The goal is to buy stocks that will go UP in price. Easier said than done or everyone would do it.

 

There are a million or so reasons that influence a stock’s price over the short and long-term. On a day-to -day basis, the biggest influence on a stock’s price movement is generally the overall market of ALL stocks. In the short-term — most stocks move together.

 

Over days, weeks, months and years you see these returns develop their own independent patterns — some winners, some losers.

 

How do you decide if an individual stock might be a good or bad pick?

Our blog post, Intro To Stock Picking: Story, Numbers, Expectations explores the fundamental elements to choosing long-term winners in the stocks market.

Order Types When Placing Stock Trades

For new investors, the different “order types” when buying or selling stocks can be confusing. Our blog post (copied below),  "Order Types" breaks down the differences between market, limit and stop orders.

Market Order

 

The ”Market Order” is the simplest type of order. When you enter a market order, you are instructing your broker to buy or sell the stock at the next available price, from or to the next available investor. You have given no instructions for what price you are willing to pay or take for the transaction, only that you want it done immediately to or from the next willing party.

 

Limit Order

 

A “Limit Order” sets a price for what you are willing to pay if you are buying, or receive if you are selling. For example, if you are only willing to pay $20 for a certain stock, but nothing more than $20, you would set a Buy Limit for the stock at $20. Your order will only execute if the price is $20 or below. 

 

Similarly, if you own a stock and are selling it, but only want to sell if it reaches a certain price, you would set a Sell Limitorder. If you set a sell limit order of $30, the order will only execute if the price is $30 or above.

 

Stop Order (Stop Market and Stop Limit)

 

A “Stop Order” is activated when the price of a stock crosses a certain price. Sell stops are entered BELOW the current price, and buy stops are entered ABOVE the current market price.

 

Every stop order will be entered as either a stop limit, or a stop market order. Once the "stop price" is reached, the marketor limit order is activated. If you entered a stop market order It becomes a market order once the stop price is reached and is bought from or sold to the next wiling party. If you entered a stop limit order, once the stop price activates the order, it becomes a limit order to buy or sell based on the limit price entered. 

 

Therefore, a stop limit order will need to have two prices entered - the stop price and the limit price. For example, if you own a stock trading at $30 and set a sell stop limit at stop $20 limit $19, the order will "activate" if $20 is reached, but only sell if there is a bid for over $19. Assume for example, you made both your stop and limit price $20 (stop $20, limit $20). If the price were to drop to $20 but never trade back over $20, your order may not be filled. 

 

Compare this to a potential stop market order with a stop price of $20. In this situation, the order would be activated when the price touched $20, but will be filled to the next available bidder at whatever price available. In the case of a stock that is dropping in price quickly, you may see a fair amount of "slippage" or a gap between the stop price and the actual price at which the stock is sold.

 

Sell stops are often used as an attempt to protect investors from losing more than a specIfied amount of money on an investment. If you own a stock, but want to sell it if it drops below a certain price, you could enter a sell stop (also known as a stop-loss) order. For example, assume you own a stock that currently trades at $30 per share, and you want to sell if it drops below $20, you would set a sell stop at $20. Similarly, if you want to buy a stock, but only if it goes above a certain price, you would set a buy stop.

A buy stop is often used by investors who are “Short” a stock, meaning they profit from the stock going DOWN in price. When you short – you actually sell to open the trade, and buy to close it. They may use a buy stop as a stop-loss to try to limit the amount they can lose.

Other investors may use stops to buy stocks only after they have moved above a certain level. New investors may find this odd… “Why would you want to buy it higher if you can just buy now for lower?” However, there are many strategies that prefer to wait for a price to “break out” above a certain level to confirm a trend before purchasing. These investors prefer to wait for this “confirmation” and are wiling to pay a higher price for it. Of course, there are no sure-things in the stock market, and oftentimes this “confirmation” can be reversed quickly.

 

These are just a few of the more common reasons investors may use different order types in their strategies. As with all things related to investing in the stock market, it can get fairly complicated quickly.

 

 

Remember, for every seller, there has to be a buyer. Both parties think they are right. For this reason, I love the quote "One Investor’s Sell Stop Order is Another Investor’s Buy Limit Order." While one person may be saying "I'm selling if it drops to $20 - someone else may be saying "I'm not buying until it hits $20".

 

That's what makes a market. 

More to come!

THANKS FOR READING!

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Copyright 2020 Teaching Kids to Buy Stocks

The information on this website is for information and education only and is NOT advice.