Let’s face it: Investing can seem intimidating. All the numbers, charts, jargon and acronyms—it’s enough to make any casual observer dizzy.
But there are serious consequences to being so scared of getting your feet wet that you stay out of the game entirely. “If you do not invest, you are risking your future financial security,” says Certified Financial Planner Stacy Francis, CEO of New York-based Francis Financial.
That could mean the difference between retiring one day on your own terms or having to work throughout your golden years, paying for your kids’ college tuition or having them take out students loans, affording the life you want or always playing catchup.
The good news is that it isn’t as hard as you think. “The media is inundated with suggestions on what to do with your portfolio, making investing seem more complex than it actually is,” says Oklahoma-based Certified Financial Planner Shanda Sullivan. Indeed, investing can be as simple as picking a single target-date fund or a good mix of low-cost index funds and ETFs.
Need to brush up on some basics? Review these investing questions you should be able to answer by 35. Then dive deeper with these 15, which we’ve collected over the past several weeks. (Still got questions? Leave them in the comments section and we’ll tackle them next.)
1. What does it mean when a company “goes public”?
Going public is one way for a private company to raise money and expand its business. The process is called an initial public offering—or IPO—and is when a company issues shares to the public through the stock market for the first time. New shareholders then own a stake of the business, and the company (hopefully) gets an influx of cash to (hopefully) grow.
2. How does a company decide how many shares to sell?
Before the IPO, a company enlists the help of an investment bank to help determine its value, using a lot of fancy-schmancy assessment techniques and formulas to consider historic and projected revenues, profits and costs, as well as potential plans for new products, whether marketing can drum up more interest in the company and how similar companies are valued.
After that, the bank will advise the company’s board about how many shares to sell. Then the board makes the final decision. Typically, owners want to keep more than half of the shares to maintain control.
3. Who decides a company’s stock price when it first goes public?
You do—kind of. The underwriter (a.k.a. the investment bank) can calculate an appropriate price given the number of shares it recommends. But part of the valuation process is determining public demand for a company’s IPO.
If demand is high—i.e. you, your friends and everyone else is in love with a company’s products or services—the price may also be high. If demand is low, the price will follow suit, and the company may even hold off on going public.
4. What should I look for when deciding whether a stock is a good buy?
For most people, buying individual stocks isn’t a good idea. “People often choose stocks by what their friends recommend, what stock is ‘hot’ or what is currently going on in the market, which is the opposite of what you should do,” Sullivan says. “You make emotional decisions rather than rational ones.” Instead, she recommends mitigating your risk down by sticking with low-cost index funds, target-date funds or ETFs (a.k.a. exchange-traded funds, which can include shares of many companies but trade like a stock).
But if you are prepared to dive into single stocks and the accompanying risks, you can review a company’s stats online for free at places like Yahoo Finance, Morningstar and Bloomberg. You may also want to look at its price-to-earnings ratio—if its P/E is low, that indicates that it’s selling for a relatively cheap price—forward-looking earnings and current price relative to its 52-week high and low. You can also read through analysts’ reports. And note that its dividend-paying history is a sign of good financial health.
Sound like a lot of work and math? Certified Financial Planner Vid Ponnapalli, founder of Holmdel, N.J.-based Unique Financial Advisors, recommends this simple approach: “A stock is nothing but [a share in] a company,” he says. “Three factors I ask investors to look into: What is the company selling? Is it making a profit? And who is running the company?”
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