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0:24 - What is a Stock?
0:52 - What is S&P 500?
2:22 - What is a brokerage account?
3:40 - Average stock market return over time
4:48 - What is Market Cap?
6:00 - Dividend stocks vs Growth stocks
To start invest in stocks, you will need three things.
A brokerage account
A long-term focus and money you won’t need for the next 3-5 years
A willingness to keep it simple
Before we get too deep, let's start with the basics, a stock represents a piece of ownership in a company, or a share. Owning share of a company gives you certain rights. Those rights can differ depending on the type of stock you own, but the most important takeaway is that by owning stock in a company, you are a part owner of that business.
When you hear “the stock market” it’s often referring to the S&P 500 which is an index comprised of the 500 largest publicly traded companies on the U.S. Stock market. You can think of it as just a gauge of how all stocks are generally doing.
Opening a brokerage account
For the longest time, fees were an inevitable part of buying stocks. You would submit an order and your broker would collect $7 to $10 for making that order happen. It doesn’t sound like much, but it made things prohibitively expensive for new folks to get started.
Thankfully, now we are truly living in the golden age of investing for individuals. Most new folks will start out with commission-free brokerages like Robinhood or E-Trade. Each brokerage has its pros and its cons -- the no-fee brokers cost less, but generally have more limited offerings and less information available to newbies.
Once you’ve decided on a brokerage, you just need to transfer money in and you can get started.
You’ve got your money burning a hole in your brokerage account, what do you do with it?
For the true beginner, it’s often best to start with index funds. Remember how I said the S&P was an index that represented the U.S. stock market? You can buy shares in a fund that tracks that index! It is one of the easiest ways for new people to start out because you are instantly diversified, owning a tiny sliver of 500 different companies at once!
If you’re interested in going that route, Vanguard, Fidelity and most major firms have an S&P 500 index fund you can buy and boom, you’re all set.
There are literally thousands of publicly traded companies -- we’re going to walk through a couple different ways to categorize them:
Big Companies vs. Small Companies
One of the most common ways to segment companies is by market capitalization. That’s a fancy way of saying “business value”
You’ll typically see companies broken up into 4 or so market cap groups:
Large cap - companies that are worth more than $10 billion, like McDonald’s and Microsoft
Mid cap -- companies worth $2 billion to $10 billion
Small cap -- companies worth between $250 million and $2 billion
Micro cap -- companies worth less than $250 million
Each category has its own pros and cons -- large cap companies are far more stable, but they’re also a lot bigger, which means it's a little harder for them to meaningfully grow. After all $1 trillion companies don’t exactly double overnight. Mid, small, and micro caps are generally less proven businesses, but if they can become the leaders in their industry they could grow to large cap companies, making individuals who bought shares early a lot of money in the process.
For new investors, we generally suggest you stay away from Micro cap businesses.
Dividend Stocks vs. Growth Stocks
A lot of new investors are often drawn to dividend stocks -- these are mature companies like Verizon that pay their shareholders a specified amount every month or quarter as a way to share the profits of the company.
On the other side is growth stocks -- these are businesses that are generally younger, are growing revenue quickly, and are more focused on building out their business instead of making it immediately profitable.
Dividend stocks tend to offer stability and income, and reward their shareholders will the dividend payments and modest growth in share price. Growth stocks are less certain, but can offer big return potential for investors.
Putting this section together with the last one, dividend payers are often mid and large cap companies, while growth stocks tend to be in the small and mid cap space, but there are definitely exceptions.
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