What to know about investing in stocks

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What to know about investing in stocks

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10 Things You Absolutely Need To Know About StocksSteve SchaeferFormer StaffNew! Follow this author to improve your content experience. Got it!Jan 5, 2016,06:12am EST|This article is more than 6 years old.

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Are you a Wall Street whiz? Snacking on 50 shares ofTwitterfor breakfast and out of the stock by lunch? This post is not for you.

This post is for the average Joe, trying to put a few dollars to work in the marketor take more control over his or her investments. These 10 ideas, tips and topics should be a good primer for your stock market education. They aren't all you need to know, and won't guarantee success, but they're a good starting point for any investor.

For more financial facts and ideas everyone should know, check out the whole series here: 100 Things You Absolutely Need To Know About Money Before You're 35

1) Buy Low, Sell High

Sounds so simple right? And yet investing is a rare part of our financial lives where things getting cheaper feels like a bad thing. Few consumers are lamenting cheaper prices at the pump amid the collapse in oil prices over the last year and a half, yet a moderate market fall is treated as the death knellfor the bull market.

These are facts that are not mutually exclusive: the current bull market will end, and over almost any long-term horizon stockshave proven to be beneficialinvestments that generally grind higher.

(Jin Lee/Bloomberg)

2) There Is No Such Thing As A Sure Thing

Oil prices at $100 a barrel are here for the long haul;Alibabais a world-beating juggernaut that can't be stopped;ESPNis immune to the shifting sands of the cable business and it's ability tomint money for Disney will never be in doubt. Just three examples of story lines once taken as gospel that have been shot full of holes.

A word to the wise: the conventional wisdom isn't always wrong, but it frequently has terrible timing. Some of the stock market's best investors over the long term  Warren Buffett, Carl Icahn and their ilk  have placed their biggest bets on companies out of favor or during times of market stress.

While long-term gains for stocks at large have historically been a safe bet, individual companies are inherently riskier.

3) Get Familiar With Filings

While some investors might think they have a sixth sense for finding good companies, the rest of us have to do our homework. There's no better starting point than the regular filings public companies make with the SEC, which are required to detail everything from company finances to potential conflicts and risk factors.

The annual 10-K includes the most information, ranging from quarterly and annual financial numbers to descriptions of business lines and management commentary on growth opportunities and costs. Regulatory filings will also detail any senior management changes, acquisitions, and stock transactions by executives or board members.

All filings for U.S. public companies, and foreign companies that list on U.S. exchanges, can be found online through the SEC's EDGAR system.

4) Think Long Term

Taxes aren't the only reason short-term trading is a loser's game for most investors. Trying to buy or sell shares based on a quarterly earnings report or an economic data point is a game for automated trading platforms, not the average Joe.

Better opportunities come when a stock or sector is dismissed by the market and languishes despite steady economic results that will produce a long stream of profits. Transportation stocks like airlines and railroads have gone through long out-of-favor stretches, only to churn out considerable gains when economic conditions and industry dynamics align.

Years of mismanagement in the airline industry led to a string of bankruptcies in the 2000s, but the resulting merger wave made American Airlines, United Continental andDelta Air Linesmore competitive and poised to benefit from trends like plunging fuel costs.

5) Dividends Are Your Friend

Apple'sshare price dropped from $110.38 to $105.26 in 2015. That's an 11% decline, but investors who owned the stock all year lost just 3%. Why? Because Apple paid out $2.03 in dividends over the course of the year.

Dividend-paying stocks aren't immune from declines, but they do offer a degree of insulation that others don't. A word of warning though  rich dividends that look too good to last often don't. Just ask owners ofKinder Morgan, which slashed its quarterly payout by 75% in December.

Shark Tank investor Kevin O'Leary is fond of a statistic that shows the bulk of the S&P 500's returns over the years have come from dividends, not price appreciation. That's why he says he'll never own a stock that doesn't pay at least some of its profits out to shareholders. (See "Why Kevin O'Leary Loves Dividends.")

6) There Is No Perfect Metric

Professsional and amateur investors alike have their favorite measures of growth and value, from price-earnings ratios to dividend yields and profit margins. But there is no single number that divides good stocks from bad ones. A stock that looks cheap at 10 times earnings can go to 5 times in a flash, and a flashy tech startup that looks pricey at 3 time sales can easily jump to 6 in a heartbeat.

7) A $100 Stock Isnt Expensive And A $5 Stock Isnt Cheap

The price of a single share is not the right number to evaluate when deciding if a stock is a good buy or not. While triple-digit price tags might cost too much for a new investor with limited funds, loading up on 100 $1 stocks isnt necessarily a better strategy. Think of investing like grocery shopping -- theres a reason you go to the store with a list instead of just deciding what to buy based on price tags.

8) Taxes Can Take A Bite Out Of YourProfits

The FANG stocks Facebook,Amazon.com,NetflixandGoogle(Alphabet) -- had a great run in 2015, with returns ranging from 34% to 134%, but from a tax perspective any investor who bought last year and eyeing the exits wants them to keep climbing. That's because the one-year mark is a line of demarcation for the tax man.

Selling stocks you've held for less than a year triggers a short-term capital gain, taxed as ordinary income. That could mean kicking back anywhere from 25% to 39.6% to Uncle Sam. But hold those same stocks for at least 12 months and the tax rate drops to 15% for most tax brackets.

9) Know What You Need, And What You're Paying For

The evolving brokerage industry is a beehive of competition to offer the latest and greatest trading options, but for most investors the basic essentials can be found anywhere.

Make sure you know the type of buy or sell order you're entering. A market order, for instance, will be executed as soon as possible, whatever the prevailing market price; a limit order by contrast will only complete the transaction within price parameters you've established.

10) Take Market "News" With A Whole Shaker Of Salt

The first trading day of 2016 had not shortage of headlines, from a plummeting Chinese stock market to GM's investment in Uber rival Lyft and the severing of relations between Saudi Arabia and Iran. But is that any reason for U.S. stocks to plunge more than 2.5% (as they did before bouncing off their lows)?

As an investor, the news flow driving day-to-day gyrations in the market should be taken as interesting reading rather than a reason to make or change strategy.

Follow @SchaeferStreetSteve Schaefer

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