Stock Investing for Novices

So, why invest? A few key reasons include:

• Beating inflation
• Creating wealth to meet financial goals
• Saving for retirement

Inflation refers to increased prices and the corresponding fall in purchasing power over time. Inflation averages historically at 2% per year, meaning that to maintain your standard of living, your income and assets should at least grow at this rate annually.

Saving for financial goals (e.g., buying a home, car, education, etc.) and retirement requires putting aside funds today and growing them to meet future needs.

Of the wide array of assets in which you can invest, stocks are one of the most common for many Americans. Also known as common shares or equities, stocks represent an ownership interest in a company – when you buy a stock, you buy a small piece of ownership in that company. The U.S. stock market is considered the world’s largest, comprising over 5,000 listed companies and a market value of over $50 trillion.

Given this breadth, it’s critical to have a good process for evaluating and selecting stocks. Educating yourself on stock market basics is helpful as you begin this process. This means familiarizing yourself with:

• Market exchanges: These are platforms where securities like stocks, bonds, commodities, and derivatives are bought and sold (e.g., New York Stock Exchange and Nasdaq).
• Market indices: Indices, such as the Russell 3000, are used to measure how well a group of stocks or assets are performing. They represent a basket of securities and often serve as benchmarks for investors.
• Stock sectors: A sector is a group of companies operating in similar industries or sectors of the economy (e.g., technology, healthcare, consumer goods, etc.).

Another core concept to understand is market capitalization, which represents the total value of a company’s outstanding shares (total shares multiplied by current price).  Common classifications include:

• Large-cap: Companies with a market cap typically greater than $10 billion
• Mid-cap: Companies with a market cap generally between $2 billion and $10 billion
• Small-cap: Companies with a market cap typically less than $2 billion

Stocks are also categorized by investment style. Two common styles are growth and value stocks.

• Growth stocks are those of companies projected to grow at a significantly faster rate than others in the market. These companies often reinvest earnings into expansion and innovation.
• Value stocks are those of companies that are considered undervalued by the market. They are viewed as being priced lower than their intrinsic value.

Spreading your stock investments across multiple regions/countries, market caps (sizes), sectors, and investment styles should be considered as part of your process. This helps reduce overall risk while optimizing potential returns. Can you be over-diversified? Maybe.

At Carlson Investments, we recognize that many people don’t have the time, patience, or even interest to pursue stock market investing on their own. But that doesn’t mean you should miss out on the opportunity to build a portfolio. Don’t lose the battle to inflation!

Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.