Accounting for your life: stocks
There are a lot of symbols, numbers, and terminology associated with the stock market. We frequently hear about how the Dow Jones Industrial Average is performing or where the NASDAQ composite is sitting or whether the S&P 500 is on the upswing. While these numbers mean everything to the floor traders buzzing like caffeinated bees over at the New York Stock Exchange (NYSE), they don’t do very much for the average person other than giving a vague idea of whether the economy is doing “well.”
The illusion of complexity is what drives people away, but to avoid investing in the stock market is a financial pitfall. With thousands upon thousands of stocks listed on the NYSE along with countless funds and options, it seems mind-boggling to try and understand and parse it all. And when it comes to investing, investing in things you don’t understand is a bad idea.
The trick is not to understand everything about the stock market, but to take a big-picture approach, reading and studying just enough about the market as pertains to your investment strategies. After all, not even professional investors can digest all the information that’s out there. Large investment firms usually have armies of analysts grinding out the numbers round the clock, and even then are only just scratching the surface.
So, what does it mean to look at the stock market from a big-picture perspective? A good place to start is to consider the different assets that are available, and how to invest in them. Rather than getting stuck on all the minutiae, we’ll go ahead and focus on three big asset classes: stocks, funds, and commodities.
To begin, let’s take a look at the kinds of funds that are out there. Broadly, funds fall into three categories: index funds, mutual funds, and exchange-traded funds (ETFs). Index funds are designed to track a market segment (e.g. healthcare, large companies, tech) and serve as market indicators. However, they are not directly investable, meaning you can’t put your money into an index fund. For this reason, the focus is mostly on mutual funds and ETFs.
Mutual funds are a form of pooled investments, where you and many others give up your money to be managed by a professional. Usually, mutual funds are designed with a specific market sector in mind and invest in that sector accordingly. It’s not uncommon to see mutual funds that are designed to track index funds, so if you’re interested in following a specific index fund, it’s best to invest in an associated mutual fund. Mutual funds are priced at the end of the trading day, meaning that if you were to buy into a mutual fund during an ordinary trading day, the price you would pay is the price when the market closes at 4:00 p.m. EST.
Exchange-traded funds are different from mutual funds in that they can be thought of as a collection of securities. Essentially, the company that manages the ETF buys a bunch of one kind of investment, be it company stocks in a certain market sector or government bonds, and then parses it into lower-priced packages that it then offers to investors. For that reason, ETFs can be bought like stocks, since you can get shares of an ETF at a certain price, and they can be bought and sold during the regular trading day. ETFs are attractive since it gives investors exposure to a diverse collection, and often at a lower price than buying individual shares of stocks or individual investments.
Next, we have commodities, such as gold, silver, and crude oil. Believe it or not, you can buy and trade these resources on the market. Investing in commodities is not always a great way to accrue wealth in the short term since gold and silver prices fluctuate dramatically over short periods. However, investing in gold and silver can be a good way to protect your money during times of market volatility since gold is gold the world over. So, in the long term, commodities can guard against market downturns, although the buy-in price is steep. We’ll discuss more about commodities later.
Lastly, we have good old stocks. Everyone’s heard of stocks, but not everyone knows what it means to own a stock. To own some stock means you buy shares of the issuing company. So, if you bought say 50 shares of AT&T, you now technically own that fraction of AT&T, although that’s likely nothing compared to the literal millions of shares that investment firms have in these major companies. When you own a share, you are a shareholder of the company, and your fortunes from the stock depend on the company’s performance. Stocks can range from low-risk and low-reward to high-risk and high-reward, with the stocks of start-ups and new-born industries being the most volatile. Investing in stocks requires more diligence and attention to the data, as well as consistent monitoring of market conditions and trends.
With that brief overview, hopefully, the markets don’t seem so overbearing. Of course, there’s a lot of nuance within each of these three very broad categories, but the majority of investments available fall into at least one of these classifications. Moving forward, we will focus our attention on each of these groups, starting with funds, followed by commodities and then stocks.