Investing Ep. 1: OMG buy these stocks
COVID-19 has had a big impact on our economy: from sharp increases in unemployment to the government putting trillions of dollars into relief programs and individual payouts. However, one of the most prevalent worries has been COVID-19's impact on the stock market. But what is the stock market? What is investing? How does it all work?
We'll answer these questions and more as we kick-off the first episode of our Investing mini-series! Investing is the act of committing money (i.e. saving) in the hopes of generating profit (i.e. money making money). It all ties back to Compound Interest, where the different ways and time periods we commit our money, the different the amount of money we generate at the end of our investment.
To understand what investing in the stock market means, we first have to understand a little business lingo.🗄
Dosco: Costco for Dogs
Let's say there's a fictional retail-chain called Dosco, where you can buy dog treats, toys, and all the essentials for your labradoodle in bulk and at a discount. Since Dosco is a public company, we have access to their balance sheet, which is a high-level snapshot of a business at a given point in time. That is, it shows Dosco's current assets. The assets of a company is essentially anything a company owns. For Dosco, this could be the store buildings, tennis balls, or even cash in the bank. Assets can be broken up into two parts:
Liabilities are the things that a company has to pay back. Let's say Dosco didn't have enough cash to buy its first store, so it took out a loan with a bank, and used that money for the store. The store is something Dosco owns, but the money it borrowed becomes a liability. Equity is just Assets - Liabilities, and would be the money you'd get if you sold all of the assets and paid off all the debt.
In the next section, we'll see how a company's Equity factors into a company's stocks. But first, you need to answer a text from your friend Alice!
Psst...you should check out this stock
Wow, Alice seems super excited! But what the heck is she talking about?? There's soooo much jargon 😰. Fear not! We'll break this down sentence-by-sentence so we know exactly what's going on.
DOSC stock price just went up from $1 to $5, increasing their Market Cap by $40M!
Stock: Also called a share, this is just a slice of a company's Equity. Whereas taking on debt was one way Dosco could raise money (racking up their liabilities), another way to raise is to sell ownership of its Equity to investors. For a public company like Dosco, it has to divide up its Equity into chunks, and sell those chunks on the stock market. This gives people who own the stock the right to sell it in the stock market.
Stock Market: A "market" is just a place where people buy and sell things of value (also called "trading"). The stock market is just where people trade stocks. More specifically, it's a collection of "exchanges", which is just a location where people sell "securities", which is the technical name for ownership that you can buy/sell, like stocks. The price tag of individual stocks in the stock market is called the stock price or price-per-share. The "name" that stocks from different companies have on the stock market is called a ticker symbol. In this case, Dosco's symbol is DOSC.
Market Cap: This is essentially how much the entire company is worth in the eyes of the people who participate in the market.
So if we work backwards, a $40 M Market Cap increase by the $4 increase in stock price, tells us that Dosco has 10 M shares (aka "slices of ownership"). Therefore, the current Market Cap would be 10 M x $5 = $50 M. Another way to think of Market Cap, is the price tag of the company. Unlike Equity, where the value is based on literally adding up how much money you'd get from selling all that Dosco owned, the Market Cap also factors in the "invisible value" of the fact that you're buying Dosco. Maybe the Dosco CEO is so cool people are willing to pay more for chew-toys just so they can get something with their face on it? Maybe the chew-toys have a reputation for being particularly fun for dogs? All these factors (and more) affect the price-per-share!
Definitely knew good news was coming when I saw the S&P 500 go up 20 points last week.
S&P 500: This is one of the most notable investment indices. The S&P 500 is essentially a weighted average of the top 500 largest U.S. companies, factoring in all of the Market Caps of these companies, weighted by how much of the Total Market Cap that the sum of these companies comprises. The higher the % of the total Market Cap a company is, the more it'll affect the S&P 500 when its stock price changes.
Investment Index: This is usually just a weighted average of a group of stock prices that fit some criteria that's used as a "health check" on a specific industry.
Looking forward to that Dosco $0.5 per share dividend at the end of the year 😉
Dividend: Dividends are just stocks that come with the added bonus of payments (usually in cash*) as a % of the amount of stocks shareholders (those who own stocks) own. The rules are completely up to the company, but they usually are given at a set frequency, and are usually based on the profits of the company within that frequency. In this case, Dosco decided to offer annual dividends, and this year's shareholders will receive $0.5 for every stock they own. This is one of the 2 most common ways of generating profit on stocks; the other selling stocks.
* Some dividends can be paid in stocks or other property.
Dosco → Costco → S&P 500
Wow, look at all we learned from just 4 sentences! Now that we know the general lingo on how stocks and the stock-market work, let's look at a real example: Costco. To do this, let's Google it 💻.
This line-graph plots the stock price of Costco (aka COST) in the NASDAQ stock exchange over the course of the day that I took this screenshot (April 3rd). On the very left where I hovered my cursor, we see the stock price of COST was $289.16 per share at the start of the day, and fluctuated between $286 and $292 throughout the day. As the stock price gets updated, we'll see the current stock price (in this case $288.65) change, with the change since the last stock price illustrated to the right (in this case, down -2.83 "points", which corresponds to 0.97%).
The numbers at the bottom are summary stats for people who do a lot of stock trading. For example, the current MarketCap is $127.46 billion, the opening price (when people started buying/selling that day) was $289.16, and the high/low are just the current max/min stock prices within this time period (in this case, today). One thing you'll notice is how bumpy the stock price is during the day: this is common for almost every stock! This changes when we look at different time periods, though! Let's take a look at COST over the last 6 months:
For 4 months, COST hovered around $290, then shot up to ~$310 in the beginning of February before dropping to $281.14 on February 28. This is around the time COVID-19 started spreading, and the oscillations since have been reflective of the recent uncertainty around a post-Coronavirus world.
Remember: stock prices are set by people, and people have emotions that can be affected by things outside of just a companies balance sheet. Sometimes, they can be affected by things unrelated to the company itself! However, in times of uncertainty, it's a good idea to zoom out even further to see how the stock price of a company changes in the long-run. Let's take a look at COST in the last 5 years:
The 5 year picture tells a very different story than the 6-month or 1-day picture. Here, we see that COST started at a whopping $149.64 in 2015. That's way less than the "6-month low" of $281.14. The general trend throughout the years has been positive, with some bumps along the way.
The takeaway here is that stock prices change all-the-time, and so it's important to have a long-term perspective on stock prices and the stock market in general. Take a look at the S&P 500 since 1980:
The S&P 500 definitely has its highs (also called "bull market" 🐮) and lows (also called "bear market" 🐻), but like Costco, the general trend is positive.
The best thing to do now is learn more! There are a lot of resources out there (my favorite is Google Finance) where you can find stock prices, investment indexes, and general news about the stock market. Here are some ideas for how you can put on your investing hat 🎩 :
Look up the stock of your favorite company! Make sure it's not a start-up, because only public companies sell stocks on the stock market. See how its stock price has changed in different time periods. Is the overall trend positive 📈or negative 📉?
Look up the balance sheet for your favorite company (again, stick to public companies). There are a lot of factors that can affect the stock price of a company, and therefore the Market Cap of a company, but checking out a company's balance sheet is a quick way to see if a company is over or undervalued 🤔
Check out some of the other popular indexes → Nasdaq Composite (how the tech industry is doing) , Dow Jones Industrial Average (how companies in the U.S. in general are doing) and the Russell 2000 (how small companies are doing). It's good to become familiar with these indices not only because they come up so often in the news, but also by the fact that you can invest in them (which we'll talk about in future episodes of the Investing mini-series)!
Since stock prices are so volatile (go up and down all the time), unless your job is to trade stocks, you're better off thinking about investments in the long-term. This quote by world-famous investor Warren Buffett sums it up nicely:
"Uncertainty actually is the friend of the buyer of long-term values"
Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.