What you need to know before investing in stocks

Like many things, investing can be as simple or as complicated as you make it. The most important thing when you’re still a beginner is making sure that you have the basics covered. It does take some time to prepare yourself for investing, but that will pay off down the line. The worst thing you can do is nothing. As the old saying goes: “Scared money doesn’t make money.”

The lack of financial education present in basic curriculum paired with the lived experiences of people aged 23-38 has created a dire situation: More than half of Millennials are not investing at all. Whether it’s lack of funds, an overload of obligations, or just not knowing what to do, young people are not buying stock directly or through mutual funds, exchange-traded funds, or retirement plans. The stock market is on track to close a banner year with near record highs and the people who would benefit the most from this growth over time aren’t investing.

In order to invest in the stock market, you do not need a ton of cash, zero debt, or your MBA. But you do need to know a few things.

Know your history

Let’s begin at the beginning. The stock market’s been around for more than 400 years. In the early 1600s, countries like Britain and Holland needed a way to make their bank accounts larger to progress as industrialized countries. The powers that be looked for companies that were doing well and made them a deal to trade them some money in exchange for a small part of their profits. To say that it went well is an understatement.

As a result of this financial success, regular people wanted to be involved. The idea caught on and Dutch companies began issuing shares on pieces of paper called stocks. People met in person to swap their paper stocks. These meetings were the original stock exchanges.

In the developed world, major stock markets emerged in the 19th and 20th centuries. All of the world’s major economic powers have highly-developed stock markets that are still active today. Today, practically every country in the world has its own stock market.

Know the upside

Since its inception in the US, the stock market has historically returned profits to its investors. Stock market returns do vary greatly from year-to-year and rarely fall into the average range, but with that being said, over the last 100 years, the stock market’s average annual return is about 10%, before inflation is taken into account.

In spite of being conflated with the economy all the time, the stock market is not the economy. The stock market is driven by the emotions of investors while the economy is the created wealth and resources in terms of the production and consumption of goods and services. They often do impact each other, but they are not the same.

A strong economy with lots of growth can lead to a strong, or bull, market. When companies are doing well, a drop in unemployment and will coincide with a rise in corporate profits and consumer spending will increase, therefore creating a strong economy. People are working, earning money, spending more, and saving more. On the other hand, a more passive, or bear, market indicates a slowing economy with investor fear and pessimism. We typically call it a bear market when there is a 20% decline over a two-year period in the market.

Know the downside

Economists are able to define the bull and bear market cycles fairly predictably at this point based on the deluge of data, but even they’re wrong from time to time. There’s good evidence to show that investors who try to predict highs and lows tend to earn much lower returns than those who just buy and hold.

Know how it’s done today

Remember the Dutch paper stock exchanges? We’ve moved into a more modern and technologically advanced version of those these days, but until recently, they weren’t that far-off from what you might be picturing. There are two stock exchanges that you’re probably familiar with. The New York Stock Exchange dates back to 1792 and is the largest marketplace to buy and sell stocks and bonds in the world. The NASDAQ is a totally digital stock exchange where you can trade a lot of big tech companies, like Apple and Facebook.

In the United States, stock market exchanges have grown up quite a bit since the early days. You used to only be able to purchase shares of stocks through a broker or banker. Think about those guys in the movies yelling “Buy! Sell!” and running around like crazy. (And there’s a reason they’re all men in the movies—women weren’t allowed on the floor of the NYSE until 1943.)

Thankfully, a lot has changed. These days you can log on to any online brokerage and place a purchase order, and then sell off shares whenever you please. When this technology first came on the scene, placing trades was as expensive to do online as it was in person or over the phone with a broker. But now that lots of players have emerged, fees are reflecting the number of options.

Know your fees

Without commissions or trading fees, many wonder how the brokerages make money. Income for online brokers comes from a variety of sources, including interest on clients’ cash balances, from stock loan programs, commissions on other products they offer, or management fees on advised accounts.

Public believes in transparency and so you can read an article about how the company makes money here. In summary, income is made from securities lending, which is when someone will borrow stock in order to sell it at the current market price, all with the end goal of buying it back at a lower price and returning the borrowed shares to the lender. Public also makes money from investors’ cash balances.

Know your investment options

Stocks

A stock, aka equity, is a share of ownership in a company. Stocks are sold at the price of each share, the cost of which varies from company to company.

Bonds

A bond is basically a loan made to a company or the government.

Mutual and index funds

A mutual fund is a diversified package of stocks and bonds overseen by a professional. An index fund is the same, but with no professional oversight.

Exchange-traded funds

ETFs are several investments sold as a package and traded just like a stock.

Know what you want to invest in

As a beginner, it can be intimidating to decide which individual stocks are the ones to pick—even seasoned investors are daunted by the task. One way to make it easier is to continually educate yourself. Public makes learning easy by allowing you to not only follow themes and specific companies but to openly discuss investments with friends and domain experts.

When you do decide what to invest in, don’t be intimidated by share prices. Public allows you to buy slices of stock, another term for fractional shares. Purchasing fractional shares allow you to buy fractions of stocks in companies that have a high price per share.​

The bottom line

When the first stock market opened, it was meant for everyone to use it as a tool to grow their wealth. Over time, it became more inaccessible to the average person. Prices per share are higher than ever and fees can eat up most of your returns. Public makes it possible to invest in slices of shares using a dollar amount that fits into your budget.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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