What Are Stocks?
When you buy a company’s stock, you are buying an ownership portion (or shares) in that company. For example, if you buy Apple stock, you are buying an ownership interest in Apple and are thus a shareholder.
When the company performs well and earns higher profits, the value of the company’s stock increases. When the stock value increases, you get larger returns on your stock investment. When the company does not perform well and its profits decrease, your investment returns decrease; you either make less money or lose part or all of the money you invested.
When researching stocks, you will want to consider how well you think the company will perform in the future. This can be difficult to predict, so investment experts suggest that you diversify your investments. Diversification means holding different types of investments, such as stocks, bonds, and real estate. When you diversify, if the value of one investment decreases, your other investments will hopefully continue to perform well, continuing to make money for you. When you diversify, you lower your overall risk of losing money.
When investing in stocks, it is particularly important to diversify by holding stock in more than one company and industry. There are several ways to do this, and we provide the details below.
Self-Investing vs. Brokers and Investment Firms
Before you begin investing, you must decide whether you want to buy and sell on your own, with a broker or financial advisor, or with an investment firm. This decision will mostly be based on two factors:
- How much research and work you are willing to put into your investing
- Whether or not you are willing to pay a commission on your returns
If you are willing to put in the work to invest on your own, you will be able to keep 100% of your returns. Alternatively, you can find a financial advisor or investment firm in your area. These individuals and companies have the resources to do market research and select stocks and securities for you, but they will take a commission from your earnings.
If you choose to invest on your own, online brokerage sites are the cheapest and fastest way to buy stock. Each brokerage will require you to open an account, either online or by calling the company directly to assist you.
Brokerage companies typically charge a small fee each time you buy shares of an individual stock. However, some brokerage companies don’t charge any commission for buying shares of individual stocks. If you hire an investment advisor, you may pay a brokerage fee in addition to the commissions your advisor charges. We’ve listed the most popular brokerage sites below, and we’ve linked to their personal trading or brokerage account pages:
- Ally Invest
- Charles Schwab
- Fidelity Investments
- Interactive Brokers
- M1 Finance
- Merrill Edge
- SoFi Invest
- T. Rowe Price
- TD Ameritrade
- Zacks Trade
Stock Information Sheets
When researching a particular stock, you can look up its information sheet to get important details such as the stock’s ticker symbol, risk level, expense ratio, and past performance.
There are many places to find information about different types of stock funds. Most brokerage sites, including those mentioned above, offer educational information on individual stocks and mutual funds. Additionally, you can use a service like Morningstar to find investments and monitor the stock market; Morningstar Premium provides expert analysis and ratings to help you choose your investments.
Below, we explain the types of information you’ll commonly find when researching stocks and what they mean.
Stock Ticker Symbol
A stock fund’s symbol, or ticker, is the shorthand name for identifying that particular fund. The ticker symbol is typically just a few letters, and it is usually located in parentheses after the long-form name of the stock on the stock information sheet.
When looking up the stock fund on informational websites or investment brokerage sites, you can use the ticker symbol. For example, when looking up Alibaba stock, the ticker symbol for that stock is “BABA,” so you would search for “BABA” on the brokerage website.
Investing in stock carries risks. Stocks can gain or lose value at any time, and you are not guaranteed to make money. Stocks are a riskier investment than a savings account or certificate of deposit because they depend on company performance. Stock investment returns are not guaranteed the way the Federal Deposit Insurance Corporation (FDIC) guarantees savings deposits up to certain amounts.
When you invest in stocks, you have the potential to make a higher return on investment than if you had invested in a less risky asset. For example, Vanguard’s Total Stock Market Index Fund had a 13.82% rate of return over the last 10-year period. Meanwhile, the best interest rates for savings accounts during the past 10 years were around 2%. The trade-off for the potential to make more money is accepting more risk.
A stock’s information sheet tells you its risk level. A stock can be a higher risk or lower risk, depending on the diversification of the fund and other factors. For example, the information sheet for Vanguard’s Total Stock Market Index Fund indicates a risk rating of four out of five, which means that it has a higher-than-average risk and higher potential reward. You can use this information to diversify your stock holdings and include a varied mix of higher-risk and lower-risk stocks to protect your overall investment.
The stock information sheet also tells you the expense ratio of the stock. The expense ratio reflects how much it costs to maintain the stock; it appears as a percentage, and it is calculated by dividing a fund’s operating expenses by the average dollar value of its assets. It is assessed as an annual fee to shareholders.
The expense ratio cuts into your investment gains. The higher the expense ratio, the higher the fee you will pay, and the less money you will make overall. For this reason, it is important to check the expense ratio of your desired stock. For example, at the time of this writing, the stock information sheet for Vanguard’s Total Stock Market Index Fund indicates an expense ratio of 0.04%.
The stock information sheet also tells you the stock’s past earnings performance over the last year, five years, 10 years, or even since the stock fund’s inception. This information may give you an indicator of future earnings potential and the strength of the company (or companies) in the stock fund. Note, however, that past performance is not a guaranteed indicator of future earnings.
The current market price of the stock or stock fund is also indicated on the stock information sheet. The stock price fluctuates daily and tells you how much it would cost to buy one share of that stock on that particular day.
Types of Stocks
There are a few different types of stocks and funds (collections of securities) in which you can invest, and each comes with its own advantages and limitations, depending on your personal investing preferences. Below, we summarize the major types.
An individual stock is a share in a single company, such as Apple, IBM, or Alibaba.
- Diversification: Low
- Expense ratio: High
- Risk level: Generally higher, but the risk varies by stock
How to Buy
First, you need to identify the individual stock you want to buy and determine how many shares you want to purchase. You can buy individual stocks through a brokerage company. If you have an investment advisor, he or she will typically purchase the stock for you through the brokerage company.
You can buy as many or as few shares of individual stocks as you like. The price you pay when you purchase the stock is the stock’s market value on the day of your purchase. The easiest way to pay for the stock using an online brokerage site is to pay via bank transfer, which you can set up once you create your online account. Brokerage companies may also let you pay via other methods, such as personal checks. You can contact the brokerage company you choose directly for specific payment information.
A stock fund that pools money from shareholders to invest in different companies is called a mutual fund. When you buy shares of a mutual fund, you can choose a fund that is made up of 100% stocks, or a mix of stocks, bonds, and other securities. You can also select a mutual fund that includes stocks of companies in certain industries, such as information technology, oil and gas, or agriculture.
- Diversification: High; highest when including multiple types of securities
- Expense ratio: Higher than index funds and ETFs, but lower than buying each individual stock separately
- Risk level: Customizable; can be actively monitored
For more information on mutual funds, see our lists of high dividend mutual funds and mutual funds that have averaged 12% returns for the past five years.
Active vs. Passive
Mutual funds can be actively or passively managed. An actively managed fund has a fund manager or financial advisor who conducts research and analysis to determine what shares to include in the fund. The shares that make up an actively managed fund will change over time as the fund manager continues to do research and analysis. Owners of actively managed funds believe that regularly changing the composition of the fund will yield them higher investment returns.
Passively managed mutual funds, such as index funds (discussed below), are funds that represent a broad diversification of a large part of the U.S. or international stock market. Owners of these funds buy the fund and hold onto it, without changing the composition of the fund, because they believe that over time the average rate of return will be the same or similar to that of actively managed funds. Passive stock investments are a good choice for owners who do not want to spend the time researching and analyzing the stock market and individual stocks.
Note that over a long period, there is very little difference, if any, in the rates of return for actively managed and passive funds, such as Vanguard’s mutual funds.
How to Buy
As with individual stocks, you can buy mutual funds yourself through online brokerages by setting up an online account. Or, you can hire an investment advisor to select and purchase mutual funds for you, and pay the advisor a commission each time you make a purchase.
Mutual fund prices are calculated at the end of each trading day, so you can only purchase them once per day and at a specified time.
Unlike individual stocks, mutual funds usually require a minimum cash investment — typical minimums are $1,000 or $3,000, but can be as high as $10,000 or more for some funds. Once you have opened the mutual fund, you can continue to make investments in the fund in any quantity that you want.
Note that if you sell a security at a price higher than the purchase price you paid for it, this is considered a capital gain, and you must claim it on your income taxes, per IRS guidelines.
Index funds are similar to mutual funds in that they contain shares of various companies, typically in different industries. The main difference between index funds and other mutual funds is that index funds are always passively managed; the composition of securities generally does not change.
Index funds track the performance of a specific market benchmark (or “index”), such as the S&P 500 Index, which monitors 500 large U.S. companies. An index fund may contain all of the stocks and bonds in its target index, or it may just be a representative sample. For example, the Schwab Total Stock Market Index Fund is designed to track the entire U.S. stock market, including small, medium, and large companies, making the fund extremely diverse. What you choose depends on what you personally want to invest in and your risk tolerance.
- Diversification: High
- Expense ratio: Lower than mutual funds and buying individual stocks separately
- Risk level: Customizable, but not actively monitored
Note that since index funds have lower expense ratios and typically perform as well as actively managed funds, owners of index funds can earn higher returns when their funds perform well. Index funds are a good choice for investors who want diversification, low fees, and passively managed funds.
How to Buy
As with individual stocks and mutual funds, you can buy index funds yourself through online brokerage sites. Alternatively, you can hire an investment advisor to select and purchase index funds for you, and pay the broker a commission each time you make a purchase.
As with mutual funds, index funds typically require a minimum buy-in cash investment. Vanguard, for instance, offers index funds with a required buy-in of as little as $1,000. Just like mutual funds, once you open the index fund and make the initial investment, you can continue to purchase shares of the fund in any quantity that you want.
Note than since index funds involve far less buying and selling than mutual funds, you will realize fewer capital gains, which can make index funds more tax advantageous.
For more information, see our list of the best performing index funds to consider.
An exchange-trade fund (ETF) is similar to a mutual or index fund in that it is highly diversified, but it trades like an individual stock. An ETF may be made up of 100% stock, or a mix of stocks and bonds. An ETF contains stock from different companies — even hundreds or thousands of different companies — but is sold at a single price point like an individual stock. For example, Vanguard’s Extended Market ETF contains shares of companies in the consumer goods, financial, energy, health care, information technology, and real estate sectors, among others.
- Diversification: High
- Expense ratio: Lower than mutual funds and buying individual stocks separately
- Risk level: Customizable; ETFs can be traded as needed
How to Buy
ETFs generally do not require a large minimum initial cash investment, as mutual funds and index funds do. ETFs trade like an individual stock, so you can purchase as little as one share of the ETF (or several), and you can purchase them any time trading is open. The price you pay per share depends on the market value of the ETF on the day of your purchase.
Although you can trade ETFs can at any point during a business day, most are considered to be passive investments, because there is not a fund manager who is actively buying and selling. Because of this, ETFs also realize few capital gains.
Types of Stock Trades
There are different ways to purchase individual stocks or stock funds (such as mutual funds, index funds, or ETFs). We have summarized the types of trades you may use below.
The most common type of trade is a market order. This occurs when you place the order with a brokerage company, and the company executes the order immediately. If you buy stock via a market order, you pay the market price of the stock fund at the time you place the order. If you sell, you receive the prevailing market price for the stock at the time the buyer places the order.
Buying or selling a stock at a particular price is called a limit order. You set the limit price, and the order is filled when a buyer or seller is willing to meet that price.
Buying or selling a stock when it reaches a particular market price is called a stop order. You must set the stop price first; when the stock price moves past your set stop price, then a market order — either buying or selling the stock at its new market price — is completed.
For a stop-limit order, first, you must set the stop price. Second, you must set the limit price, which is the sales floor or purchase ceiling at which you want to stop trading the stock. Once the stock moves past your stop price, a market order is completed. When the stock reaches the limit price, the brokerage company stops buying or selling the stock for you.
Investing in stocks involves buying ownership shares in individual companies, or investing in many companies through diverse funds like mutual funds and index funds. Before choosing investments on your own, you should research the stocks or funds you are interested in, taking into account information like their risk levels, expense ratios, past performance, and current price. You can either invest on your own through a brokerage (usually an online brokerage) or hire an investment advisor to help guide your portfolio. Your choice of investments will depend on how much work you want to put into investing and whether or not you are willing to pay a commission to an investment advisor.