18 Things You’re Too Embarrassed To Ask About The Stock Market
The stock market is a hot topic. You might hear your family members, your friends or the talking heads on your favorite news programs discussing it daily. If you’re looking to join in but aren’t sure if you’re ready to talk about the complex world of investing intelligently, we’ve got you covered. Here’s a little stock market 101 to help you join the conversation and not sound like a novice. These questions and answers will help you understand what’s happening so you can also make smarter money moves.
1. What’s stock anyway?
Stock is the general term used to describe the shares, or parts, that make up a whole company. If you own stock, you may own one or more shares of a company, which means you own part of the business.
2. Are bonds, mutual funds and ETFs the same as stocks?
In short, no. But knowing what bonds, mutual funds and ETFs are will help you understand why it’s not completely black and white.
Bonds are investments that come with a fixed interest rate and timeframe. When you buy a bond, you’re loaning money to a company, state or government. At the end of that timeframe, say 10 years, you’ll most likely earn the money that was stated on the bond. However, there is always a chance that the entity that you loaned the money to defaults and can’t pay out. In general, though, bonds are seen as more conservative investments that are less risky than stocks.
A mutual fund is a group of bonds, stocks and/or other investments created by a money manager. It includes multiple people who have essentially pooled their money together to invest in a larger sum of investments. As an investor, you own a portion of the bonds, stocks and other investments in the mutual fund. Anyone can invest in a mutual fund and you don’t need a lot of money to do so. Typically, mutual funds can only be bought once per day after the stock market has closed.
An ETF, or exchange-traded fund, is similar to a mutual fund. ETFs trade on an exchange, such as the S&P 500, and track an index which is basically just a portion of the stock market. Mutual funds don’t trade on an exchange. ETFs can be bought and sold whenever the market is open and often times have lower fees because the price of ETF shares fluctuate throughout the day as they are bought and sold.
3. What are the Dow, S&P, NYSE and Nasdaq?
When people talk about the stock market, they’re most likely talking about the most popular exchanges and indexes: the Dow Jones Industrial Average, Standard and Poor’s 500 Index, the New York Stock Exchange (NYSE) and the Nasdaq Composite Index. Also known as the Dow, the S&P 500, NYSE and the Nasdaq, each exchange is home to a group of companies.
The Dow has only 30 large companies in its index, such as Coca-Cola and McDonald’s, and it works on a point system. The S&P 500 has 500 companies that actually hold about 80 percent of the entire value of publicly traded companies and are traded on the NYSE and the Nasdaq. The NYSE is the world’s largest stock exchange by market cap, estimated to be worth more than $21 trillion. The Nasdaq contains more than 4,000 large and small company stocks in its index.
4. What does it mean when the stock market goes up and down?
The stock market goes up when share prices rise, most likely because a company is either increasing in value or demand, meaning there are a lot of people who want to buy shares of that company. The stock market goes down when more people want to sell shares than buy shares, most likely because a company isn’t doing well financially.
5. Does the stock market affect my retirement account?
The stock market affects your retirement account because it is an investment account. You most likely have a diversified portfolio of investments in your retirement account, which may include stocks, bonds, mutual funds and more. As the market rises and falls, your 401(k), 403(b), Roth IRA or IRA may make or lose money, too. Over a long period of time, you’re more likely to make money than lose it, though this is not guaranteed.
6. Does it cost money to buy stock?
Stock costs different prices depending on the share price and the number of shares you wish to buy. If you work with a broker who helps you buy and sell stock, then you may also pay a fee to that person so she can manage your portfolio for you. Some fees are per trade while other brokers may charge an annual percentage fee. However, there are some free trading platforms like Robinhood and Acorns that allow you to invest in the stock market with very little money and no additional fees.
7. How do I buy stock?
You can buy stock in a number of ways. Simply find a trading platform, robo-advisor or brokerage company that you trust, and then assess your goals. Are you looking for short-term or long-term gains? Think about how much money you have to spend, too. For beginners, Robinhood is a great app that lets you buy and sell stocks with as little as $10. You do it all on your own so there’s little guidance, but if you want to get your feet wet with buying stock, it’s a good place to start.
8. What’s risk?
Risk is the chance you’re willing to take with your investments. If your tolerance for risk is higher, you may be a more aggressive investor, choosing to put more of your money into stocks than bonds or mutual funds. On the other hand, if your tolerance for risk is low, you may want to stick with conservative investments, putting little money into the stock market.
9. What’s the difference between a broker and a robo-advisor?
A broker is a person who works to help you buy and sell investments like stock. A robo-advisor is a company that helps you manage your money through an online platform. Companies like Ellevest and Betterment are great platforms for buying and selling stock and investments. They will most likely match you with a pre-constructed investment strategy and you can check in on your portfolio, buy and sell, or change your level of risk all online.
10. Am I guaranteed to make money in the stock market?
No. Flat out, you’re not guaranteed anything in the stock market. Most likely, in the long run, you’ll make some money, but it’s not a sure thing. Over time, you’ll most likely make money and lose money, so it’s just a matter of when you decide to sell your stock that will ultimately determine if you’ve made money in the end.
11. If I sell my stock, do I have to pay taxes on the money I made?
The money you make on your investments is called a capital gain. If you sell your investment before the one-year mark, you’ll pay taxes on that capital gain at the same rate as your income tax rate. If you sell your investments after the one-year mark, you’ll pay taxes on the capital gain at a rate of 15 percent. When it comes to bonds, you’ll be taxed on the interest you make in the same year that you received it at your income tax rate. There may be some exceptions, so consult your financial advisor, broker or robo-advisor to get a clear understanding of the tax that you’ll need to pay on your investments.
12. What’s diversification?
Diversification is an investment strategy that spreads your money across multiple investments. Often stated as “not putting all your eggs in one basket,” you shouldn’t put all of your money into one investment — stock, bonds, mutual funds, etc. You should diversify your portfolio so you have a better chance of making money on those investments. A broker or robo-advisor will help you diversify your portfolio.
13. What’s an annuity?
In short, an annuity is an investment offered by an insurance company. There are two types of annuities. A fixed annuity has a clear interest rate for a set number of years, and it starts either immediately or sometime in the future. A variable annuity invests your money into accounts that are similar to mutual funds, and the money you receive in retirement income is based on how well those accounts performed.
14. What’s a dividend?
A dividend is when a company shares its profits with investors. Some companies pay dividends in the form of cash, so when they make money, they share that profit with you in the form of a check. Others allow you to reinvest that money into the company through additional shares. These additional shares can also grow over time and can be a smart way to increase your investments for the future. Not all companies offer dividends and they aren’t guaranteed.
15. What are bear and bull markets?
A bear market is when the stock market falls at least 20 percent across multiple indexes. A bear market happens about every three and a half years, according to GoBankingRates.
A bull market is when the stock market is rising or expected to rise. Investopedia says that bull markets can last for months and even years.
16. What’s a correction?
A correction is when the stock market falls by at least 10 percent from a recent peak. For example, if the Dow reached a peak on Monday, and by Friday its total points fell by 10 percent, it could be seen as a correction. According to finance site The Motley Fool, it’s important to know that corrections happen often, rarely last long and can be seen as a great time to buy shares at low prices.
17. What’s volatility?
When the stock market takes big swings in both high and low directions, it’s known as volatility. The stock market is seen as volatile when risk and unpredictability increases. When volatility is low, the market is more steady and predictable.
18. When’s the best time to buy stock?
Buying stock is always a gamble. However, it could be smart to buy shares of a company when prices are low, such as when the stock market is down. In the long run, the share prices will most likely rise in price and you’ll make money, though this is not guaranteed. Investing in the stock market can be scary, as you’re not promised to make a profit. However, it can also help you grow your money over time so that you’re more financially stable in the future.