Understanding Stocks

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What Is a Stock?

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Welcome back to Pave Academy! We've already taken you on a journey from the fundamental 'what s' and 'how s' of investing, navigated through investment strategies, and explored the various types of investment accounts. Now, it's time to plunge deeper.

In this module, we're delving into the world of Stock Investing.

Our first stop is understanding stocks and how they work. For many, stocks represent the heart of investing. But what is a stock?

Simply put, a stock is a slice of ownership in a company. When you buy a stock, you buy a tiny piece of that company.  A company is divided into millions and can even have over a billion owner shipshares (hence the name “shares”)." And when you buy one, or even a fraction of one, you're a part-owner of that company.

Why do companies issue stocks in the first place? Well, they do so to raise capital, fund new projects, expand their business, or even pay off debts. By buying their stock you become a part owner of the company and, unlike a bond, the future of your investments is tied to the company's future growth. As a stock owner, you can vote in future stockholder meetings on the company’s direction and have your voice heard.

The value of a stock typically rises and falls based on the company's performance, market sentiment, and various economic factors. Remember our previous discussions on risk and return? Stocks are a perfect example! You make money by buying a stock at a low price and selling it at a higher one. But beware—prices can go down and up, so there's a risk involved.

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How Does a Stock Price Move?

Now, understanding stocks requires more than just knowing they represent a share in a company. It is important to know the drivers behind a stock price’s movement. There is usually an explanation for a stock price’s fluctuation. It could be company news, broader economicindicators, or global events. There are two risks in trading stocks; one is called systematic risk, which affects a stock's sub-industry, sector, or entire market. The other risk is specific to itself and nothing else and is called non-systematic risk. For example, when a company is about to report earnings, it will encounter nonsystematic risk, meaning that the stock price will move because that news is unique to that company.

However, with the massive presence of ETFs and the heavy data analysis accompanying today’s stock investment world, a stock related to the company that just reported earnings can move in sympathy, even though it did not report earnings. If the company’s earnings release causes a particular ETF, of which that stock is a component, to move, it impacts every stock in that ETF. So, the interrelationships between stocks are pretty far-reaching.  

But to keep things simple, if a company announces a revolutionary product or registers higher profits, its stock price might surge. On the flip side, unexpected events or poor financial performance can send stock prices tumbling.

Stock prices are also influenced by supply and demand dynamics. The stock price increases if more investors want to buy as tock than sell it. This could be caused if an analyst publishes a favorable report and raises its price target. Conversely, if more people want to sell as tock than buy it, there's a potential for the stock price to drop.

It's a delicate balance, continuously shifting with the ebb and flow of market sentiments, company performance, and global events.

Once you've acquired stocks, they become apart of your investment portfolio. Over time, they can offer returns in two main ways: capital appreciation, where the value of the stock rises, and dividends, where companies share a portion of their profits with stockholders.

Some companies, particularly well-established ones, will share a portion of their earnings with stockholders as dividends. These are typically paid out quarterly and can be a consistent source of income for investors. You can either cash out these dividends or reinvest them to buy more shares, making it a versatile way to grow your portfolio.

By now, you've connected some dots. The strategies we discussed earlier? Active vs. Passive, Growth vs. Value, Long-term vs. Short-term? They all play crucial roles in your stock investing journey.

This is just the beginning of our deep dive into stock investing. Stay with us as we unveil more layers, intricacies, and strategies.

Types of Orders for Stock Trading

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Market Orders

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Welcome to Topic 2! If you've been following along, you already know that stocks are contracts of ownership in a company that you can acquire. You're familiar with why they exist and how their value can change. But here's a question: once you've done your homework and picked a stock, how do you buy or sell it?

That's what we're going to talk about today. Specifically, we're diving into the different orders you can place when trading stocks. Knowing these can give you more control over your trades and help you be a more thoughtful investor.

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Let's start simple: Market Orders. These are orders to buy or sell a stock ASAP at the current market price. You're saying, "I want in (or out), and I don't want to wait!" The upside? Your trade happens fast. The downside? The price can fluctuate, and you might not get the price you saw a second ago.

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Limit Orders

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Next up, we've got Limit Orders. Imagine you've spotted a stock but are only willing to pay up to a specific price for it. You can set the maximum price you're ready to pay with a limit order. Your order gets executed if the stock's price meets or falls below your set limit. The same logic applies when you're selling. The benefit is that you control the purchase price. The potential cost? The trade might not happen if the stock n ever hits your limit.

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Stop & Stop-Limit Orders

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Now, let's talk about Stop and Stop-Limit Orders. A Stop Order becomes a Market Order once a stock hits a specific price. Say you own a stock but want out if its price falls to a specific price. You set a Stop Order at that price; if it hits, the system sells it at that market price.

A Stop-Limit Order is like a fusion of Stop and Limit Orders. When the stock hits your stop price, the order turns into a Limit Order with your set limit price. You get more control this way, but the trade may not go through if the stock doesn’t reach your set prices. Stops are often hit when the market drops fast, which can be an argument for using Stop-Limit Orders. Still, you also need to balance getting a lower selling price than you would have preferred against the worst-case scenario of your stock going into a free fall, creating an outsized loss in your portfolio.

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Trailing Stop Orders

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Last but not least, we have Trailing Stop Orders. These are like Stop Orders but with a twist. Instead of setting a specific price, you put a percentage or dollar amount that trails the highest price the stock reaches. If you own 10 shares of a stock trading at $10, purchased it at $8, and wish to retain only half of your profit, you can set a stop order at $9. But let’s say that stock goes to $12, and your $9 stop would cause you to lose more than half of the profit that you now have. That is a good situation to use a Trailing Stop Order.

So you can set a stop order if the stock price drops by a percentage or dollar amount, then the order triggers and sells at market price. It’s a clever way to secure some gains if a stock's price is climbing, but you want to sell if it starts to go back down.

There you have it, folks! These are some of the primary types of orders you'll encounter in the world of stock trading. Understanding how and when to use them can significantly impact your investing journey

How to Research& Select Individual Stocks

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How to Look at Individual Stocks

In Topic 2 of this module, we dove headfirst into understanding the world of stocks. In Topic 3, you will sharpen your skills as we go through the art of researching and choosing individual stocks.

The stock market is like a vast sea of opportunities in many ways. But how do you pick a collection of stocks that will help you meet your investment performance goals?

Let’s focus on one stock for simplicity’s sake. To do this right, we need to filter out all the noise from social media that tries to get us all to focus on that great stock that will solve all our needs. A well-organized portfolio of stocks is the vehicle you want. It is such a daunting exercise that people who want to “advise you” are afraid to approach the subject. They avoid it because most do not know how to tackle the problem. We will circle back to this.  

Where Should You Start?

OK, with that warning, where do we start?  It begins with research.
You've got news articles, annual reports, earnings calls, and more. These are your primary tools to understand a company's financial health, competitive position, and prospects. Begin by understanding the company's fundamentals. Look at their balance sheet, income statement, and cash flow statement. Are they profitable? Do they have a healthy amount of debt? How's their cash flow?

Next, familiarize yourself with critical metrics - P/E ratio, dividend yield, and the debt-to-equity ratio. These indicators provide a snapshot of the company’s valuation, profitability, and financial health.

Most investors do not have an accounting degree or a financial analyst’s back ground to make sense of this essential information. But as a first step, know these are the building blocks to understanding a company.

However, numbers are just part of the story. It's also essential to understand the company's competitive landscape. Who are their competitors? What differentiates this company? Are they leaders in their industry?

Moreover, the industry itself is a vital piece of the puzzle. Some sectors, like tech or pharmaceuticals, might be growth-driven, while others, like utilities, might be more stable and dividend-focused.

Remember, while research helps you make informed decisions, risks are always involved. As discussed in previous modules, diversification is essential to mitigate some of this uncertainty.

A nice side effect of this research effort is that it empowers you to choose companies whose missions and practices resonate with your beliefs.

Understanding Stock Market Indices

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What Is a Stock Market Indices?

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Welcome back to Pave Academy. I know, last time, we were deep in the world of individual stocks. But today, let’s focus on the forest, not the trees– let's talk about stock market indices.

What is a stock market index? In its simplest form, it's a yardstick—a benchmark that tells you how a particular group of stocks performs. When someone says the S&P 500 is up, they mean that the largest 500 companies in the U.S. are doing pretty well. It’s the financial world’s way of giving you a lot of information in a single, digestible morsel.

When we say 'indices,' we're talking about the big names you might've heard of, like the S&P 500, Dow Jones, and NASDAQ. These are baskets filled with different company stocks. They give us a quick idea of how the overall market or specific parts are doing.

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Why Should You Care If the Index Goes Up or Down?

Why should you care if the index goes up or down? It is similar to a thermometer in some ways. If it's rising, you get a snapshot that the companies in that index are doing well overall. By checking the indices once a day, you will quickly get a feel for what constitutes a good day, a perfect day, a quiet day, or a lousy day. If it's falling, it can be an alert to start watching how your portfolio is doing.

Now ,the thing about indices is that they can impact investors' emotions and motivate them to sell or buy more. With the significance of quantitative investing, changes in the indices can cause computer trading models to enter buy or sell orders. If the stock indices are rising to new highs or new lows, it can impact computer sentiment and alter buying habits, which in turn can impact the economy. The Federal Reserve also tracks stock prices and can impact monetary policy.

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Well, that wraps up our chat on stock market indices. We have more Topics lined up to keep cracking the code on all things investment. So stay tuned, and let's keep laying the bricks on your financial journey.

Investment Strategies for Stock Investing

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Building an Investment Game plan

If you've been with us so far, give yourself a pat on the back. This isn’t easy stuff to digest, so don’t hesitate to return to earlier Modules or topics to refresh your knowledge. Today, we're turning our focus to strategizing for stock investing.

You might remember from our previous episodes that there are various types of accounts and different kinds of investments you can have in those accounts. We talked about stocks, how they work, and even how to pick them. But once you’ve grasped that, it’s time to work on how to apply this knowledge strategically.  

Let's start with the basics. Long-term vs. short-term investing. Long-term is like the slow cooker of investing: Set it and forget it, mostly. These are companies you believe will grow over the years. On the other hand, short-term, at its extreme, is day trading. It can also apply to buying stocks for up to a few weeks, looking for quick gains. Of course, it comes with its risks and should be approached cautiously.

You could also think about it in terms of Value vs. Growth. As we have mentioned, value stocks are stable and reliable. That being said, they're probably not going to surprise you. Growth stocks have lots of potential for growth; they are named for a reason but can be volatile.

Now, if you're the kind of investor who wants their stock picks to reflect their values, there's a strategy for that, too. It's called Socially Responsible Investing, or SRI. This strategy's focus is supporting eco-friendly, socially inclusive companies with ethical corporate governance. It’s allowing your money to work towards the world you want to live in.

Here's where Pave can be your co-pilot. Our platform makes it easier to align your investment choices with your goals, risk tolerance, and, yes, even your personal values. We’ve got the tools and analytics to help you craft a strategy that's just right for you.

There's no one-size-fits-all strategy here. Your investment game plan can and should be unique to you.