Stock Market Investing For Dummies, By A (Former) Dummy!

Investing in the stock market is an excellent way to put your money to work to help you achieve long-term financial prosperity. Through thoughtful planning, strategic maneuvers, and a disciplined approach, you can realize substantial gains. However, taking a sloppy, reckless swing at big returns can cost you dearly. As someone who has tried it both ways, let me help put you on a path to competent investing.

Look at me! I'm so important, I have two video conferences going at once.

The Basics

More seasoned investors can skip this section. As a level-set for everyone else, here are some key terms to help you understand the basics when investing your hard-earned money in the stock market:

Stock - Also known as a share, it represents a small portion of ownership of a company. The sum of all the shares outstanding (issued by the company) equal the market capitalization (or market value) of the company.

Bond - Entitles the investor of a debt obligation of a company or government entity to the repayment of the debt plus interest at the set rate. Bonds are rated based on perceived ability of the company/government entity to pay back the debt obligation. The more likely to pay, the lower the interest rate the investor will typically receive.

Fund - A collection of stocks or bonds that share a common characteristic to meet an investor's goals, either actively (mutual fund) or passively (ETF) managed by a financial institution. For example, FTEC is the symbol for an Exchange-Traded Fund (ETF) that owns stock in 331 technology companies, passively managed by Fidelity. Owning a share of FTEC is like owning a smaller piece of each of the 331 companies. These funds all charge a recurring fee (net expense ratio) for their management, with ETF's typically having lower fees than mutual funds.

Stock Market - General term for the exchanges where shares of company stock or debt are bought and sold, or traded. For example, NASDAQ or New York Stock Exchange (NYSE). Investors trade through a broker (either an individual, a financial advisor, or an online platform like Fidelity), who collects a commission/fee for the transactions.

Ticker Symbol - The abbreviation for a particular stock, bond, or fund used to uniquely identify the investment. For example, FTEC from the definition of Fund above.

Investing - Buying into a specific stock, bond, or mutual fund/ETF with the expectation of a return on the investment.

Return - The money made in addition to the initial investment, typically expressed as percentage of the initial investment over a period of time.

Risk - An investor's willingness to lose his/her initial investments to attain larger returns. Bonds are typically less risky than stocks, and funds are typically less risky than individual stocks or bonds.

Diversification - Having a multitude of investments in different stocks/bonds/funds to reduce the risk of one investment failing. The classic "don't put all your eggs in one basket" approach.

How Do I Get Started?

Well, if your company offers a 401(k) and you contribute, guess what? You are already invested! Most 401(k)'s offer a limited selection of mutual funds, including some "target" funds designed to adjust investments as you approach your retirement. Understanding what you're invested in is important, especially over the course of your career. If you don't currently invest in your company's 401(k), I give you my blessing to stop reading today's blog and start contributing immediately. I'll tackle the pros and cons of different ways to invest, but the 401(k) is usually the best way to invest for starters.

If your company doesn't offer a 401(k) or a similar fund, no worries! You can still become an investor. The easiest way is to open an account with a trading platform (Fidelity, Robinhood, etc.). You can transfer money from a back account and start trading! Without knowing your individual investment goals, money available to trade, and risk tolerance, I don't have any hot stock tips. However, if you're new to investing, I highly recommend starting off with some mutual funds or ETF's. There are several considerations in finding a good fund, and each trading platform will have different ways to compare/contrast funds. You can look at historical or projected returns, individual stocks/bonds held in the fund, financial metrics, or stock market analyst opinions. The real key is understanding what you are buying... otherwise, you'll end up like me!

BLHI - Bet, Lost, Hopeless Indeed

It was 2006, and this young "professional" author had some disposable income. The mortgage was getting paid, I was still cruising in my Dodge Stratus that I owned outright, and I even had money to buy some Miller High Life after my Tuesday night bar volleyball league. Now, it was time for my money to make money! I was always interested in the stock market, and thought I should set up an online trading account to invest my extra dough. While I had some financial sense, I had not completed my MBA in Finance yet, and really didn't understand investing strategies. However, everyone gets rich in the stock market, right? This was just before the Great Recession, and my fiscal arrogance was at an all-time high. I did some rudimentary research and thought I'll outsmart everyone and buy some "value" stocks, which included Blue Holdings, Inc. (BLHI). Value stocks typically mean the financial metrics of the company show the company's stock should be worth more than the actual share price. Not a bad strategy at all; however, it does not mean everyone is a winner. I bought this gem at $3.79, then sat back and waited for it to double in price. Except it never did. This fashion brand conglomerate never came back into vogue and struggled stay afloat. You can see from the chart below, BLHI ended up going bankrupt! It took several years to even sell it out of my portfolio to realize the losses for tax purposes!

In case you thought I was making this up, that's real pain.

Know What You Don't Know

While I did make some money on other investments, I wanted to point out my biggest investment flop for a reason. It was a major learning experience. I had no clue what I was doing. I was investing in a company I had never heard of, based off of one analyst's opinion that the stock was undervalued. And it cost me $1,500 in 2006 money. Had I earned an average investment over that same period of time, I would have approximately $3,800 - even factoring in the Great Recession stock market crash!

While my BLHI saga may scare you off from investing, losing all your investment is highly unlikely. In fact, the average stock market return is around 7-8% annually, meaning you'd make $7-8 per $100 invested each year! Over a long period of time, investing in the stock market is a no-brainer. I will revisit investing in many future blogs, as there is so much to know about investing. Until then, put some of your cash to work in the market and get a slice of AAPL pie!