- An introduction to various investment instruments and how to invest in these instruments
- Stocks: it’s all about earnings and earnings growth, but there are other “external” factors
- Mutual funds: a pooling of stocks
- Exchange Traded Funds (ETFs)
- Types of Accounts
- brokerage account
- retirement accounts
- 401(k) Plan
- Roth IRA
- Traditional IRA
- What we recommend: contribute to your 401(k) plan first, then open a brokerage account for after-tax investments, then augment retirement savings with either Roth IRA or Traditional IRA account
This article is an introduction to investments. We will cover equities such as stocks, mutual funds, and exchange traded funds (ETFs). Then we will discuss the types of account where you can buy and sell these types of equities to include a brokerage account, and various retirement accounts such as the 401(k) Plan, the Roth IRA (Individual Retirement Account), and the Traditional IRA.
As the title implies, this article is only the first of a series on Investments. Other articles that may be of interest to you include:
- 7 Golden Rules for Successful Investment – empowers you with a more disciplined approach (less emotional chaos) and makes you a more informed investor
- Buying Stocks – a guide to your first trade
- Protect Your Investment: The Stop Loss Sell Order – limit your downside
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Stocks is one of the fundamental elements of capitalism. You buy shares of a company’s stock in the hopes of increased shareholder value over time in the form of price appreciation and/or dividend payouts.
So What Drives the Price of a Stock Higher?
Ah, isn’t that a million dollar question? There are lots of factors. The same factors can work against the stock price and drive it down. Here are a few:
Supply and Demand. Sounds obvious, right? As with most things, supply and demand drives the price. When there is more supply (shares of stock being sold) than demand (shares of stock being bought), the price goes down. Conversely, when there is more demand than supply, the price tends to go up.
So what drives supply and demand? There is supply from shareholders wanting to sell to lock in their profits, “profit taking” as it is called. Shareholders could also be selling because they are disappointed with the company’s earnings, reacting to some bad news, and/or exiting their positions due to devaluation of shareholder value. There is demand from buyers when they want to buy the stock when there are great earnings reports, promise of increased revenues, of increased profit margins, or of increased profit. Sometime these actions are based on facts, other times they are based on rumors. Whether the motivation is true or false, it’s all about the collective market perception of the company and the desirability of its stock.