A Beginner's Guide to the Stock Market

Stocks are usually bought and sold on what are called "stock exchanges." A stock exchange is simply a place where buyers and sellers show up and exchange their shares for money, or their money for shares. 

• The NYSE is best known for its blue chip (high- quality) stocks like Coca- Cola and McDonald's.(KO (Coca- Cola) or HD (Home Depot))
• The Nasdaq is best known for its tech stocks like Netflix and Apple.(AAPL (Apple) or NFLX (Netflix))

• Some people like to buy stocks and hold them for many years. We call them "investors."
• Other people like to buy and sell stocks more quickly, maybe holding them for only an hour, a day, a week, or a month. We call these people "traders." 

• As an individual, you cannot trade directly on a stock exchange. For that you will need a "broker" or "brokerage account." A broker is simply a middleman who gives people access to a stock exchange. 
• Every stock has a bid price and an offer (or "ask") price.
• The bid is the price at which someone is willing to buy the stock.
• The offer is the price at which someone is willing to sell the stock. 
• Memorize this phrase right now: “You sell to the bid, and you buy from the ask.”

• An index is simply a collection (or "basket") of stocks. Let's say that we take the 500 U.S. stocks with the largest market caps and toss them into a big basket. That basket is called the S& P 500. 
• There's the Dow Jones Industrial Average (DJIA). This is a famous index that goes back to 1896. It always contains only 30 companies. 
• Another well- known index is the Nasdaq 100, which contains mostly tech companies. 

• A dividend stock will usually make a cash payment into your brokerage account every 3 months. That cash payment is called a dividend. 
• Investing in dividend stocks is one of the best ways to build wealth. The reason it works so well is that you can take the cash from a dividend payment and use it to buy more dividend stocks. Then those dividend stocks will pay you more dividends. 

• Ronald Read, a janitor lived a simple life and funneled much of his earnings into dividend stocks. When he died at the age of 92, he left behind an $ 8 million fortune, all in dividend stocks. 
• You don't need to have a high salary to become a millionaire. You just need to spend less than you earn, and invest the rest in dividend stocks. 
• Owning a basket of dividend stocks over a long period of time is one of the best ways to build wealth. 

• Just copy him. Go here and download his letter for the most recent year. Scroll down and you will see a list of every stock that Buffett owns.
• An even easier route might be to just buy some B- shares of Berkshire Hathaway (BRK- B). You can then sit back and relax and let Warren Buffett, Charlie Munger, and their successors do all of the hard work. 

1. Don’t buy stocks that are hitting 52- week lows.(There is no such thing as a “safe stock.”)
2. Don’t trade penny stocks.(A stock that trades under $ 5.) 
3. Don’t short stocks.
4. Don’t trade on margin.
5. Don’t trade other people’s ideas. 

• Never buy a stock just because it is "cheap" or has a low P/ E. (Price-Earning Ratio)
• The key to making a lot of money is not losing a lot of money in the process. 
• Keep your losses small and manageable, especially while you are still in the learning phase. It’s OK to buy just 1 share of stock when you are testing out a new strategy 

A low or falling stock price will make it difficult for the company to attract top talent. In this way, stocks don't just reflect a company's current prospects, but also play a role in determining a company's future prospects. A company with a high or rising stock price can use that stock to buy out competitors and pay for top talent. That's what Facebook did with WhatsApp and Instagram. 

• If you are looking for a good long- term investment, buy a company that has the highest sales in its industry.
• Once a business sells more than any other company in its industry, it becomes very difficult to compete with.
• There's no substitute for being #1 in your industry.

Examples:

• Home improvement- Home Depot;
• Fast food- McDonald's;
• Toothpaste- Colgate Palmolive;
• Payments- Visa;
• Smart phones- Apple; 
• Social media- Facebook.