Stockology

Brokerages are a dime a dozen. But while the selection is great, choosing the one that’s right for you isn’t a walk in the park. First off, know that there are basically two types of brokerages: the discount brokerage and the full-service brokerage. I’m only going to cover discount brokerages because frankly, if you can afford a full-service broker, you can probably get the rest of the information on this blog from them.

So fear not! I’m going to break down brokerages for you nice and easy…

There are two main criteria when considering which brokerage to open an account with.

The first is commissions. Commission is what the brokerage charges you for making a trade. If you’re going to be trading with a lot of money, commission probably won’t be a major decision-driver for you. Otherwise, it’s no coincident that “low commissions” is what all discount brokerages advertise. If you trade a lot, commissions can really add up and eat away at your returns.

The second criterion is tools. ‘Tools,’ in this case, is a loaded term. It includes trading tools, research tools, and whatever other tools you can think of (I can only think of those two at the moment). Some brokerages have proprietary research tools. That means they have their own analysts who do research and you can read those reports. Other brokerages have third-party research tools, so you can get research reports from other investment banks, asset managers, and whatnot. Trading tools are less of a concern these days. All brokerages have real-time tickers so you can follow your stocks as they move up and down during market hours. Some offer real-time charts, Level II quotes, or proprietary trading platforms. I’ll get into these in more detail later.

Naturally, the more advanced trading tools and research tools a brokerage offers, the higher its commission. At least that’s the way it used to be. These days, it seems every discount brokerage has pretty low fees and pretty decent tools.

Here’s a good tip: DON’T PAY MORE THAN $10 PER TRADE.

E*Trade, TD Ameritrade, and Scottrade are probably the most popular discount brokerages. Even Charles Schwab, which touts itself as “a full-service brokerage at discount prices,” only charges $12.

So, as personal preference really is, well… personal preference., I would recommend going to each of those sites and signing up for a free account. Browse around and see if you like the look & feel, the research tools it offers, and the platform it uses for trading. And make sure there aren’t any inactivity fees or anything like that. The brokerages I mentioned above all shouldn’t have any.

And that’s it for brokerages.

If you’ve ever cracked open the Business section of your local newspaper, or clicked on the Finance link on Yahoo!’s front page, or simply not been living in a cave for the last y years, you’ve undoubtedly heard of the Dow Jones. Dow Jones is the publisher of The Wall Street Journal and Barron’s (a weekly business journal). Yeah, it’s those things too. But that’s not the Dow Jones I’m talking about. I’m talking about the Dow Jones Industrial Average, or the Dow, for short.

The Dow is an index of 30 companies. Some smart people sat in a room and decided to create an index of 30 companies that would best reflect the United States. These 30 companies in the Dow are known as the Dow components. Like… the components that make up something… Anyway, the Dow components are usually big companies, big household name brands that you’ve heard of. You’ve got your Bank of America, Disney, McDonald’s, General Electric, Boeing, Verizon, Home Depot, etc. Usually when people say, “The market’s up 200 points today,” they’re refering to the Dow.

There are two other main indices that you’ll want to know: The S&P 500 and the Nasdaq Composite Index. I’ll save the Nasdaq for last because it’s more confusing.

The Standard & Poor 500, or S&P 500, is kind of like the Dow. But instead of tracking 30 companies, it’s an index that tracks 500 companies. A lot of the S&P 500 components are still companies you’ve probably heard of, like UPS, or Wells Fargo, E*Trade, eBay, Gap, etc. The two indices (the Dow and the S&P) overlap. The 30 Dow components are probably also components in the S&P. I haven’t confirmed this, and I’m not going to because I’m lazy. But just think about it. If you’re going to make a list of 30 really big companies, then make another list of 500 really big companies, some of those companies are going to be the same companies, right?

Before moving on to the rest of the indices, I’m going to talk about exchanges. Trust me, I’m not deliberately trying to confuse you. It’s just better to know these things in this order.

In the United States, there are no less than 10 stock exchanges, or bourses (a word I picked up from reading The Wall Street Journal and looked up on Dictionary.com). The good news is you don’t have to know all 10, just 3 of them. The bad news is, it’s confusing. So the 3 you should know: the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX). The way exchanges work is this: When a company becomes public, it lists its shares on an exchange so that its shareholders can trade its stock.

The NYSE is the largest stock exchange in the world in terms of dollar volume. That means, more money exchanges hands on the NYSE than any other stock exchange. Then you have the Nasdaq, which is an electronic exchange. Most of the companies that trade on the Nasdaq are companies with smaller market capitalizations; smaller companies, if you will. That’s not to say there aren’t any big ones that trade on the Nasdaq. Microsoft, Intel, and Cisco are some of the biggest companies in the world that trade on the Nasdaq. It’s just that a lot of smaller companies, namely technology and biotechnology companies, tend to list on the Nasdaq rather than the NYSE.

I’m going to leave the AMEX out of this discussion because frankly, it’s not that important. 

Here’s where it gets confusing. We’ve established that the NYSE and the Nasdaq are exchanges. But they’re also indices! The NYSE Composite is an index that covers all the stocks listed on the NYSE. Likewise, the Nasdaq Composite tracks all stocks listed on the Nasdaq exchange. But wait! There’s more. There’s a Nasdaq-100 Index, which tracks the 100 largest domestic and foreign non-financial companies.

Is your head spinning yet? 

So while indices and exchanges are completely different things, there really is a fine line in distinguishing them when you hear them in the media. You’ll hear people say, ”The Nasdaq is up today,” in which case, they’re refering to the index. Or if you hear, “Apple was among the Nasdaq’s most active today,” they’re refering to the exchange that Apple is listed on. Conversely, you’ll probably never hear anyone say, “The NYSE was up today.” I don’t know why. It just doesn’t happen.

What is stockology? Stockology is the study of human growth hormones, otherwise known as HGH. Wait, what? Really? No. To be honest, what I really wanted for the name of this blog was “investology.” But that was already taken… So stockology it is.

I started this blog because I want to share my knowledge of investing with those who want to learn. By no means am I an expert, but I figure people can at least learn from my mistakes if nothing else.

Obviously, this blog is under major construction not only in terms of content, but also in terms of organization. The best way to share my knowledge would probably be in the format of a book, but how mundane would that be? Instead, it’s a blog. And I think by tagging key words or concepts, and by making them searchable, is a pretty decent way to go about it. At least for now.

Comments, questions, and suggestions are welcome. Actually, any kind of feedback would be great.

On with it then! 

The first rule of investing is… Just kidding. There are no rules to investing… Just kidding on that one too. The fact of the matter is, there are way too many rules to investing. I’ve read the basic self-help investing books as well as the down-and-dirty ones. And they’re always preaching rules. Rules to not let your emotions dictate your actions… Or rules to maximize your gains and limit your losses… I mean, they’re all great rules. It’s just that remembering them, and following them, is a bitch. Instead, I’m going to say, “Set your own rules.” So if you’re the type of person that functions most optimally without rules, and “setting your own rules” means NO RULES AT ALL, then more power to you.

The best thing to do is to be adaptive. Be adaptive and be proactive. Being adaptive means being able to adapt. Duh! Ok. It means being able to learn from your mistakes. Able to shift gears and change your game plan when things aren’t working. Simple enough, right? Being proactive is a bit more complicated. I say that because there’s a bit of persistence involved. Be proactive in learning. Subscribe to the Wall Street Journal (or just the online version, and split the cost with a few friends if you’re cheap like me), watch CNBC (or just the clips on CNBC.com if you hate sitting through commercials like me), and study annual reports (or at least get the abridged version via Yahoo! Finance like me).

Investing is not just about buying low and selling high, although that’s a really big part of it. It’s about keeping up with the news and learning what affects what. For example, an oil field explosion in Venezuela will affect oil supply, affecting oil prices, and in turn, affecting the stock prices of oil companies. Investing is also about making money. As the saying goes, “Rather than work for your money, let your money work for you.” Who hasn’t heard that one, right? The two kind of go hand in hand. The more informed you are, the more you’re able to make informed decisions when investing your hard-earned money.

If you think you’re going to be able to pick any stock and make money, you’ll probably be right 50% of the time.

If you think you’re going to be able to pick any stock and make money consistently, you’ll probably be right too, depending on what kind of market we’re in.

Wow, I’m really digging my own grave here… Let’s try again and change it up a bit.

If you want to make money by investing in the market and do it consistently in the long run, you’d better have a plan.

There we go.

So that’s it for now. I don’t want to bog you down with too many obtuse details, at least not for an entry titled “Introduction.” I just kind of want you to get into the mindset of what you need to be prepared for. There’s a lot I need to be prepared for as well. Undertaking a blog to edumacate my audience in investing is no short order. There’s a lot of brainstorming, idea-jotting-down, and all that good stuff to do. So yeah. That’s it for now.

And damn that guy for taking “investology!”