Stock Market Investing

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Common Stock

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-ownership in a corporation.

-single class of stock that represents the entire company.

-some companies have multiple classes of stock, including dual classes of stock.

-one class of stock will have more voting rights than another class of stock

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Preferred Stock

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a class of ownership that allows shareholders of a company to get a larger dividend, and that dividend is often guaranteed. Holders of such stock do not have voting rights, but they can receive special status if a company heads into insolvency. If a company is being liquidated and creditors need to be paid, preferred stock shareholders must be paid before common stock shareholders. In some cases, companies can repurchase shares of preferred stock from shareholders, often at a premium. It is also possible to convert shares of preferred stock into common stock, but not vice versa

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Bonds

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is like a loan. When you buy a bond, you are usually agreeing to lend money to a government or a company. Typically, the bond issuer promises to repay the entire principal loan amount on a future day, known as the maturity date, and pay interest income in the meantime based upon a coupon rate

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Bond Types

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There are many types of bonds, including those issued by governments, such as Treasury bonds and tax-free municipal bonds.56 These bonds are often used to fund government operations and capital projects. There are corporate bonds, which help companies fund their operations and invest in themselves.7 There are also savings bonds, such as the Series EE savings bond and the Series I savings bond.8 There are investment-grade bonds, the highest being AAA-rated bonds, and on the opposite end of the spectrum, junk bonds.910 If you do not want to buy bonds individually, you can invest in bond funds.

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Mutual Funds

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a pooled portfolio. Investors buy shares or units in a fund, and the money is invested by a professional portfolio manager. The fund itself holds individual stocks, in the case of equity funds, or bonds, in the case of bond funds.

Mutual funds are a great way to get exposure to different groups of stocks or bonds, and it frees the investor from the need to research and purchase shares of each company individually.

Mutual funds do not trade throughout the day to avoid allowing people to take advantage of the underlying change in net asset value. Instead, buy and sell orders are collected throughout the day, and once the markets have closed, they are executed based upon the final calculated value for that trading day.

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Exchange-Traded Funds (ETF)

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are very similar to mutual funds, except that they trade throughout the day on stock exchanges as if they were stocks. You can actually pay more or less than the value of the underlying holdings in the fund.11 In some cases, ETFs might have certain tax advantages, but most of their benefits compared to traditional mutual funds are largely a triumph of marketing over substance.12 You can use these or traditionally structured mutual funds in your portfolio.

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Index Funds

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a type of mutual fund, sometimes trading as an ETF, that allows an individual to "invest" in an index, such as the S&P 500. Index funds are designed to give investors returns that are in line with the index. So if you are investing in an S&P 500 index fund, your returns should mirror those of the S&P 500. There are many funds designed to track a whole host of indices that may include small-cap stocks, emerging markets, and specific industries. Index fund investing is an example of "passive" investing, as there are no fund managers actively trying to "beat" the market. The funds are simply designed to mirror the returns of an index. As a result, they usually have low expense ratios, making them cost-effective investments.

The simplicity and low cost of index funds make these funds optimal investments for people who do not want to spend a lot of time researching stocks and managing their portfolio. In fact, many financial advisors recommend index funds as a core component of investment portfolios.

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Hedge Funds

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a type of investment partnership. Often, it is formally listed as a limited partnership or limited liability company, and the partners pool money from investors and engage in a wide range of investing activity. Commonly, hedge funds engage in investment activity that is riskier than typical investments. Hedge funds will often use leverage (i.e., borrowed money) to amplify their returns, but they can also place bets against the market to make money—even if the market goes down.14 There are a variety of different hedge fund structures, but it is common for fund managers to charge investors 20% of profits plus 2% of assets as a management fee each year.15 This is controversial because managers of large funds can make millions of dollars in management fees, even if investments perform poorly. Due to government regulations meant to protect the inexperienced investor, investing in hedge funds can be difficult for most ordinary investors.

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Trust Funds

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a special type of legal entity that allows a person or organization to hold assets they will eventually give to another. For example, a grandparent could hold $100,000 in stock for a grandchild, with the stipulation the grandchild receive the money when they reach age 18. Trust funds offer tremendous asset protection benefits and, at times, tax benefits. Trust funds can hold almost any asset imaginable from stocks, bonds, and real estate to mutual funds, hedge funds, and art.

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Real Estate Investment Trusts (REIT)

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Some investors prefer to buy real estate through real estate investment trusts (REITs). They trade as if they are stocks and have special tax treatment. There are different types of REITs that specialize in various types of real estate. For example, if you wanted to invest in hotel properties, you could consider investing in a hotel REIT. REITs allow you to invest in real estate without having to buy or maintain actual buildings or land

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Master Limited Partnerships:

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Master limited partnerships (MLPs) are limited partnerships that trade similarly to stocks. Given the unique tax treatment and complex rules surrounding them, inexperienced investors should generally avoid investing in MLPs, particularly in retirement accounts where the tax consequences can be unpleasant if not masterfully managed

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Investment Mandate

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is a set of guidelines, rules, and objectives used to manage a specific portfolio or pool of capital. For example, a capital preservation investment mandate is meant for a portfolio that cannot risk meaningful volatility—even if it means accepting lower returns.

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Asset Allocation

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Asset allocation is an approach for managing capital that involves setting parameters for different asset classes, such as equities (e.g., ownership or stocks), fixed-income (e.g., bonds), real estate, cash, or commodities (e.g., gold or silver)

Asset classes are believed to have different characteristics and behavior patterns. In turn, getting the right mix for a specific investor can increase the probability of a successful outcome in accordance with the investor's goals and risk tolerance. For example, stocks and bonds play a different role in an investor's portfolio beyond the returns they may generate.

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Stockbrokers and Stock Trades

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A stockbroker is an institution or individual that executes buy-or-sell orders on behalf of a customer. Stockbrokers settle trades and make sure that cash or security gets to the right party by a certain deadline against their client's custody account. There are many different types of stock trades that you can submit to your stockbroker (at least 12 different types), but you should be careful about becoming overly dependent on them. For example, a stop-loss trade will not always protect your portfolio.34 In addition, it is sometimes possible to buy stock without a broker through programs,

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Short Selling

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an investor or speculator borrows shares of stock or another asset they do not own, sells and pockets the money with the promise to replace the property in the future, and hopes the asset declines in price so it can be repurchased at a lower cost, the differential becoming the profit. If done incorrectly, an investor can become bankrupt.

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Margin

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Brokers will often lend customers money against the value of certain stocks, bonds, and other securities within their custody account if the client agrees to pledge the entire account balance as collateral as well as provide a personal guarantee.37 When you open a brokerage account, you need to specify whether you want a cash account or a margin account.38 Most investors should be using cash accounts, in part, due to what appears to be a rising risk from regulatory arbitrage in the form of rehypothecation.

Brokers will often lend customers money against the value of certain stocks, bonds, and other securities within their custody account if the client agrees to pledge the entire account balance as collateral as well as provide a personal guarantee.37 When you open a brokerage account, you need to specify whether you want a cash account or a margin account.38 Most investors should be using cash accounts, in part, due to what appears to be a rising risk from regulatory arbitrage in the form of rehypothecation