As a new investor, are there topics I should research and terms I should be familiar with before I purchase my first stock?
I just opened a new broker account. I have done some reading on getting started and the basics of investing. Are there particular topics that I should research and terms I should be familiar with?
There is a world of information out there, and much of it is helpful in making prudent decisions. At a minimum, if your plan is to make your own investment choices, you should become very familiar with these concepts:
- Diversification. In general terms, this describes how concentrated or "spread out" your exposures are to specific companies, sectors of the economy, or particular risks (like interest rate sensitivity, for example)
- Asset allocation. This relates in some ways to diversification, and is about how the different types of assets available in the investment markets (stocks, bonds, funds holding real estate or commodities, etc) interact with each other. Much research points to the value for investors using an asset allocation model to tailor their investment approach.
- Risk tolerance. Each investor has a particular tolerance for financial risk, informed by a combination of financial capacity, time horizon (see below), and psychology. Defining your own tolerance for risk, and allowing that understanding to influence your investment choices can help you choose an investment strategy you are more likely to stick with over time.
- Time horizon. This is a core component of goal planning and risk tolerance, and essentially addresses how long you have between now and when you hope to meet your investing goal. For example, if you are 30 years old now and plan to retire at 60, the time horizon for your retirement goal would be 30 years. The time horizon may make it clear that certain investments do or do not make sense for a particular goal.
- Active and passive investing. Active investors tend to make ongoing decisions about what to buy and sell based on evolving valuation beliefs, while passive investors tend to set up a portfolio based on an asset allocation model (or similar approach) and let it ride, perhaps with periodic "rebalancing". Both types of investors can use "index funds", although sometimes "passive" and "indexed" are conflated terms.
Congratulations on taking your first step toward building (or growing) your money. Stocks can be great investments, but you do need to understand what you are doing. My advice, 1) stay away from penny stocks 2) listen to your gut 3) be careful where and from who you get advice. There is no get rich quick stock, but you may get lucky occasionally. The market is not a casino. People on TV are entertainers and not financial geniuses. I heard an analyst at a big mutual fund company say one time that he gets his best investment ideas from his kids. Look at the goods and services you use and what your friends use, they might be great investments. Lastly, don't get in the weeds and worry about knowing everything. You will learn as you go. Read books and articles by proven investors and make sound investments. Remember, when you buy a stock, you are buying into a company. Good luck!