Do You Know the Basics of the Stock Market?
Take This Quiz to Find out If You're Ready to Start Investing
This blog was written by Matt Reiner the CEO of Wela, a digital financial advisory service.
For people who don’t invest or even new investors, the stock market may look and feel more like a gamble than an investment. The market’s constant ups and downs can make every turn seem like it will bring large financial gains or damaging losses. While the world of investing can seem confusing, the more you understand about stocks and other investments the better you can manage your money in the market.
Although it is always possible to lose money, investing in the stock market can be a great way to grow your wealth given enough time and proper planning. It’s time to change your feeling of gambling in the stock market to instead be a feeling of smart investing.
Here are a few questions you should be able to answer as an investor instead of a gambler. If you think you already know the answers to these, test your knowledge by taking this quiz.
So What Exactly Is the Stock Market?
The stock market is a market in which people can buy shares of publicly owned companies to participate in the financial achievements of the companies whose shares they hold. Investors make money through dividends that these companies pay out. When those companies are profitable they can sell stocks at a profit. However, if the investor holds stocks in companies that are losing money, the price and value of those stocks decrease.
This would result in a loss of profit if the investor decides to sell.
There are several different factors that can affect stock prices such as interest rates, inflation, labor strikes, world events like natural disasters, changes in oil prices, and many more. These factors make it almost impossible to determine any future value of a company stock.
What Are Bear and Bull Markets?
To symbolize the constant ups and downs of the stock market, Wall Street has developed its own terminology. In a bull market, everything in the economy is going well. Stocks are rising, unemployment is low and the economy is growing. As stock prices rise, there tend to be more buyers than sellers in the market. A bull market can last for a few weeks, months or even years. The market is constantly changing so a bull market won’t last forever.
When stocks are falling and the economy is not doing well, this is called a bear market. A bear market also does not last for a set term as it can go on for years. During this period, investors have a hard time picking profitable stocks. Some investors use a trading strategy called short-selling to make a profit when stocks are declining. This is done when an investor sells securities that they have borrowed and prepared to buy back later at a lower price.
How Many Types of Stocks Are There?
There are two main types of stocks that investors can own: common stock and preferred stock. When people talk about stocks they are usually referring to common stocks because, well, they’re common and they are the majority of the stocks issued.
Both of these stocks represent ownership in a company but preferred shares normally come with a fixed dividend unlike the common stock, which has variable dividends.
People may choose preferred stocks because, in the event of liquidation, preferred shareholders are paid off before the common shareholders.
Which Are Blue Chips Stocks?
Blue-chip stocks are stocks from the big guys in the market; huge, well-established companies with dependable earnings such as Walt Disney, General Electric, and Intel. For a stock to be considered ‘blue-chip’ they must be consistently profitable with a dividend payment.
What Is an “Illiquid Market”?
Illiquid defines an asset or security that is not able to sell quickly due to a lack of buyers and sellers in the market. Selling it quickly would result in a loss of profit.
A market would be described as illiquid if there is a shortage of interested buyers and little is being traded.
What Is Book Value?
The book value refers to the hypothetical value of a company if all assets are liquidated or sold at prices shown on the balance sheet. This financial measure is used to calculate the amount of stockholders’ equity to the number of shares remaining.
What Does It Mean If an Investment Is Well Hedged?
An investment is well hedged if an investor limits losses on a certain stock by establishing an opposite position in the same stock and is protected against losses.
Now that you know the basics, take the quiz to see if you’re a stock market whiz.
Keep in mind that investing is a long-term game. People who find success with their investments have developed a sound strategy that they still stick with even when the market swings.
Resisting the urge to react to short-term events could make all the difference in your portfolio and help you achieve your long-term goals. Remember that it's all about time in the market, not timing the market that makes for successful investing. Consult with a financial advisor at Wela to learn more and set up an investment portfolio that’s right for you.
Matt Reiner is a founding partner and Portfolio Manager. He also coordinates the Investment Committee and translates the decisions into trades and allocation adjustments within the Wela Models. Matt also serves as a Partner at Capital Investment Advisors (CIA). Matt uses his experience and education in Financial Services to craft the digital advisor experience to bring users the same level of personalization they would receive from a traditional financial advisor.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.