Investing Internationally; How to be a global investor?

Global or international investing includes the selection of global investment instruments as part of a portfolio.

People frequently invest globally to diversify their portfolios and spread investment risk across markets.

If you are considering international investing to gain profits, this article will teach you everything you need to know.

Understanding International Investing

Investing internationally allows individuals to choose from a larger pool of investment options when building their portfolios. International investing can help diversify an investor’s portfolio by investing in assets across different economies. This can also assist alleviate some systemic risks linked with a country’s economy in particular situations.

For example, India is the fastest-growing economy in the world. And investing in the Indian markets might help investors alleviate some risks associated with the US markets.

International investing broadens the range of investment instruments available to a portfolio, beyond domestic assets. An investor might look to the same types of investment alternatives that they can find in their home country.

Global investment markets provide you with a wide range of equities, bonds, and funds to choose from.

What are the Different Types of International Investing?

Here are the types of international investing;

Direct Investments:

You can invest directly in global markets with the help of online brokerage platforms. These platforms provide access to overseas equities and are a good place to start. TD Ameritrade, Interactive Brokers, and Charles Schwab are some international brokers you can start with.

Investing in index funds/ETFs:

Exchange-traded funds (ETFs) or index funds that invest in international funds are one of the indirect ways to invest in global markets.

Investing in one or more ETFs, index funds, or equities will provide you with indirect foreign market exposure. This is the ideal option to get exposure to other markets.

Through ETFs, you can invest in a variety of markets that you believe have a future promise. Funds focused on battery technology, clean energy, or you can invest in funds that are focused on countries like India and China, for example.

With the majority of asset management firms launching foreign funds, it is easier to invest internationally today, than ever.

American Depositary Receipts: 

American Depositary Receipts (ADRs) are used to trade the equities of most non-US corporations on US exchanges (ADRs). Each ADR represents one or more foreign equity shares.

Investors who possess an ADR have the right to buy the stock it represents. An ADR’s price is equal to the stock’s price in its home market, adjusted for the ratio of ADRs to the company’s shares.

ADRs that trade in the United States can be purchased through a U.S. broker. Here are some examples of ADRs – TSM (Taiwan Semiconductor Manufacturing Co Ltd), BABA (Alibaba Group Holding Ltd), and TM (Toyota Motor Corp).

U.S.-traded foreign stocks.

Although most international equities trade through ADRs in the United States, certain foreign companies list their shares directly in the United States as well as in their home market.

Investors can purchase these international stocks that are listed in the United States and traded in the United States.

Benefits of International Investing

Let’s discuss the potential benefits of global investing;

Geographical diversification

The most obvious benefit of global investing is diversification. During market turbulence, a diverse portfolio provides a source of stability. There is a low connection between investments when they are scattered across geographies. This means that volatility in one market is unlikely to have an impact on your other investments.

Many publicly traded corporations in the United States have international revenues. For example, the S&P500 companies generate more than 40% of their revenue outside of the United States. You can construct an internationally diversified portfolio just by investing in US stocks.

New Opportunities

Global investing allows you to take advantage of financial opportunities that aren’t available in your home country.

You can even go with a theme or a mix of different areas. For example, you might like the manufacturing market in China which you can combine with a different market in Europe.

What Should You Consider Before International Investing? 

Before you consider international investing, here are the things you must consider;


Gains earned in a foreign country may be subject to taxation in that country. In that country, you may be compelled to file a tax return. There may be tax credits available, but there is also a slew of additional levies to be aware of before diving in.

Make sure your brokerage supplies you with the necessary paperwork and tools when it comes to filing your taxes.


It is now pricey to open a brokerage account that allows you direct access to overseas markets. Be aware of your per transaction charges, any minimum investment, and other factors as you begin this trip.

This would ensure you’re taking into account all the expenses associated with investing in a foreign market.

Impact of Foreign Exchange

The fluctuation in the exchange rate is an important element to consider while investing in foreign markets. When you invest in Indian markets, you’re also investing in the Indian Rupee, and you’re taking on the risk that comes with it. When the value of the Indian Rupee rises, so does the value of your portfolio, and vice versa.

Watch Out for These Risks

Access to various types of information

Many corporations outside the United States do not give the same level of information to investors as public companies in the United States, and the information may not be available in English.

Expenses associated with international ventures

Investing in international companies can be more expensive than investing in American companies.

Collaborating with a broker

If you are dealing with a broker or investment adviser, you should check to see if the investment professional is registered with the Securities and Exchange Commission (SEC) or the proper state regulating organization (for some investment advisers).

Currency exchange rate fluctuations and currency controls:

When the exchange rate between the US dollar and the currency of a foreign investment fluctuates, your investment return can grow or decrease.

Furthermore, certain countries may apply foreign currency restrictions, which prohibit or delay the movement of currency out of a country by investors or the company in which they have invested.

Political, economic, and social events

You may find it challenging to comprehend all of the political, economic, and social elements that drive markets.

Different levels of liquidity

Markets outside of the United States may have lower trading volumes and fewer listed firms than markets within the United States. They may be only open for a few hours each day.

Legal Remedies: 

If you have a problem with your investment, you may not be allowed to pursue certain legal remedies as private plaintiffs in US courts. You may not be able to collect on a US judgment against a non-US firm, even if you sue successfully in a US court. If any legal remedies are available in the company’s native nation, you may have to rely on them.

Bottom Line 

Since the turn of the century, international investments have grown in popularity. While these investments give you more alternatives, they also come with some risks.

Many investors in established economies invest in developing economies to increase their chances of making a profit. Some investments are made into managed funds, exchange-traded funds, and other similar vehicles with the goal of diversification and modest returns.

International investments not only help to improve foreign economies and bring in more money, but they also help to increase market trust and corporate credibility.

Key Takeaways

– Holding securities issued by corporations or governments in countries other than your own is referred to as an international investment.

– Portfolios can become more diversified by investing worldwide, which can improve returns and minimize portfolio risk.

– International markets, both developed and emerging, involve various levels of risk and possible reward.

Book value; What it means to investors in 2021

When it comes to valuing a company and deciding whether it would be a good investment or not, things can get a little tricky. Of course, there are a lot of metrics you can look at, but it can be intimidating if you’re not sure what you’re looking at.

For instance, you’ve probably heard about the market cap of a company. Most investors look at this metric to understand how large a company is.

But there’s another metric you can look at, which gives you an exact picture, of what a company is worth. It’s called the book value of a company.

Let’s look at it in detail.

Book Value of a company 

The book value (also known as net book value) of a company is, simply its assets minus its liabilities. It tells you how much the company is worth as per the company’s balance sheet.

Book value can also be seen as the amount left after paying off its liabilities, in the event of a liquidation.

Let’s say you invest in a company, and a year later the company closes down its business. As an investor, you have a right to claim a portion of the company’s assets. Instead of giving you your share of assets, they’ll sell off all the assets first. The company’s assets will be liquidated (sold off) and using the money, all the liabilities the company has incurred will be paid off. What’s left will be distributed to the shareholders, including you.

This total amount the shareholders will receive after paying off the liabilities is referred to as the book value of the company. In other words, a company’s book value is its basic net worth.

To easily calculate the book value, deduct the total liabilities a company has, from its total assets.

Book Value Formula: Assets – liabilities

For example, Apple Inc. (AAPL) has total assets of $323.88 billion and total liabilities of $258.54 billion. So their book value is $65.33 billion ($323.88 billion – $258.54 billion).

In the company’s balance sheet, you find the same number listed as shareholders’ equity.

Market value and Enterprise value

Now, book value is different from market capitalization or enterprise value. Market cap is the total value of a company’s outstanding shares. It is the perceived value of the company by the investors. For example, Fiverr has a current market price of $174.65, with 35.84 million shares outstanding. So that makes Fiverr’s market cap around $6.26 billion ($174.65 * 35,840,000).

Whereas enterprise value will be calculated in a different way. Enterprise value is the theoretical takeover price of a company. So it is calculated by adding its market value, and liabilities together and subtracting cash the company has. So in the case of Fiverr, that’s ($6.26 billion + $380.21 million) – $441.84 million. That gives Fiverr an enterprise value of $6.28 billion.

Now you see how these metrics are all about the value of the company still have entirely different values.

Components of Book value

A company’s book value is the value of the business according to its accounts (books). It is the net asset value of the company. This is seen from the perspective of what would the investors get if the company was liquidated. So that’s after liquidating all the assets and paying off the liabilities.

Total Assets

Assets include short and long-term investments, cash and cash equivalents, and all other kinds of financial assets. It also includes physical assets such as plants, equipment, and machinery.

Intangible assets such as patents, copyrights, and other intellectual property are also considered under total assets, but most often due to their intangible nature, cannot be represented in the company’s balance sheet.

Total liabilities

Liabilities include short and long-term debt, accounts payable, deferred taxes, and other obligations.

In a healthy balance sheet, the assets should be more than liabilities.

Using Book Value in valuations 

All of this information wouldn’t mean anything unless we can use it in valuing companies.

So, let’s take a look at how we can do that.

Book value per share

Book value per share is calculated by dividing the book value of a company by the number of shares outstanding. So in the case of Fiverr, the book value per share would be $9.52.

Price-to-Book ratio (P/B ratio)

This is one of the oldest metrics used by investors in valuing a company. The price to book ratio is calculated by dividing a company’s stock price by its book value per share. So if a company has a share price of $50 and it has a book value per share of $25, then the P/B ratio would be 2.

Limitations of using Book value

Like I mentioned above, book value is one of the oldest metrics used by investors. It was more suited for those days when most of the company’s assets could be accounted for on its balance sheet.

Today, however, that’s not the case.

Especially with modern companies, a lot of their assets are intangible in the form of brand value (Apple), patents (Qualcomm), data (Google), etc.

So when calculating ratios such as the Price to book ratio, the company might seem significantly overvalued. And that can often discourage investors, when in fact, a lot of their assets just cannot be quantified.

Another factor that should be considered while valuing a company is its profitability. A company with an excellent product and a growing business is most likely a good investment. The stock might be trading above its book value, but that’s just because profitability and future growth are taken into account by the investors.

This is the reason you should look at more metrics when valuing a company, and not restrict yourself to one specific metric.

Value investing and Book value

Value investors are in constant pursuit of undervalued stocks. P/B ratio used to be the guiding light for value investors, as the metric immediately revealed whether a stock was undervalued.

But not anymore.

Value investing has evolved over the years, and what exactly constitutes value investing has been a topic for discussion in the investing community. In a time where most companies have high valuations even before they are profitable, checking the book value to see whether the stock is undervalued, might not be a smart move. Especially when you considered the increasing importance of intangible assets.

Value investors, today, look at more relevant metrics and they look at the sector in which the company is. Because companies in certain industries can have high P/B ratios compared to other industries. For example, internet companies.


There’s no doubt that book value is an important metric in a company’s valuation. But it should not be considered as the key to unlocking undervalued stocks. It’s always better to look at more metrics before you arrive at a conclusion. As for comparison, look for companies in the same sector, that’ll give you a better idea.

And remember, it’s better late than never. So if you haven’t started investing yet, start today. Meanwhile, here’s a guide to help you do that – The 8-Step Beginner’s Guide to Value Investing.

Why do we need the stock market? Function and importance

The answer is simple.

The stock market provides companies access to money.

That is the primary reason we need stock markets.

But that’s not the only reason.

Let’s take a look at what constitutes a stock market and why do we need it.

What are stocks?

Before we dive deeper into the stock market, it’s essential to understand stocks. Thankfully, it’s not that hard.

Let’s say four friends wanted to start a company, so they put in equal amounts of money for the initial capital. All of them will be given shares that represent the ownership of the company.

The number of shares each person will receive depend on the amount of money they put in. In this case, they all will receive the same number of shares as all of them put in equal amounts of money.

Owning shares means you have a chance of receiving a portion of the profits the company might make in the future. Now, this is not guaranteed. Because the company might never make profits, and even if they do, they might decide not to distribute profits among shareholders.

But if the company decides to distribute profits, each shareholder will receive a portion of the profits, in proportion to the number of shares they own.

The company always keeps track of who owns its shares and how many. So that if in future they decide to pay out profits as dividends they’ll know who to pay.

And the stock is transferable. Why is that so important?

Because it means that if you own stock shares of one company, you can hand them over to another individual or organization, in exchange for money. You can also gift your stock shares to your friends or family, or your children could inherit them.

The stock market exists because the stock is transferable.

Why would someone buy stocks?

Individuals invest in companies (by buying shares) to make profits.

When you invest in a company, there are two ways you can potentially make a profit. The first one is through capital appreciation. That means selling shares for a price, more than you bought them for, and pocketing the difference.

Over time, stocks tend to rise in value. The S&P 500 – an index that tracks the performance of the stocks of the 500 largest companies in the US – has a produced an average annual return of 13.6% in the last 10 years. And investors make money off of this price appreciation.

The second is through cash payouts called dividends.

Like I mentioned earlier, companies might distribute a portion of their profits among shareholders. The amount each shareholder will receive will be relative to the number of shares he/she owns. These payouts can act as an active income from your investments.

There are many more reasons why people buy stocks, but these are the most common.

What is the stock market?

The stock market serves as a marketplace for stocks.

The stock market refers to financial institutions that facilitate the transfer of shares from one party to another. The stock market makes it easy for people to buy and sell stock shares.

Why is this so important?

Every transaction – whether it’s goods, services, or money, involves a certain level of uncertainty. The buyer might be uncertain about the quality of the goods, whereas the seller might be worried whether the buyer will pay in time.

The same goes for transactions of shares. The stock market lowers that uncertainly surrounding the buying and selling of shares, by providing a common marketplace for all participants – known as stock exchanges.

If you would like to know more about how the stock market works, read this article.

Stock exchange

A stock exchange is where the trading (buying and selling) of the shares happens. Market participants (individual and institutional investors) use the stock exchange to place orders to buy or sell. All the orders (to buy or sell shares) are processed at the stock exchange, and the shares and the cash is delivered to the respective participant.

New York Stock Exchange (NYSE) is one of the oldest and largest stock exchanges in the world. Stock exchanges in the US are regulated by the Securities and Exchange Commission (SEC). The institution oversees the smooth functioning of exchanges.

The stock market makes sure that you are free to buy and sell shares whenever you want. Institutions like the SEC lowers the uncertainty around investing in companies and protect investors from fraud and manipulation.

What if there was no stock market?

Buying and selling stocks won’t be easy

To begin with, investors would have a hard time buying and selling stocks. The whole investing process will be complex and expensive. You would need to approach the companies directly to buy shares. And every time you want to sell shares you will need to find a buyer on your own.

As a result, people will be very unwilling to invest in companies as they are not sure whether or not they can get their money back, let alone profits.

Funds will be hard to access

It’s worse for companies.

An initial public offering (IPO) is when a company’s shares are made available to the public to buy for the first time. An IPO has the potential to bring in a lot of funds to a company. And if the company is already well known at the time of its IPO, the company will be able to raise a significant amount of money.

But this won’t happen if there is no stock market.

And companies might decide to issue new shares in the future to raise capital. This opportunity gives them access to funds from the public, and they can access them as and when it seems necessary.

Needless to say, if there is no stock market, companies can forget about these funds.

So they’ll need to find and approach investors who would be willing to provide funds in exchange for money. It will be time-consuming and expensive. And companies won’t have access to large amounts of money. So they’ll be forced to look at alternate sources for capital.

This means they’ll have to take on debt; they’ll need to borrow money – large amounts, to grow the business. And that could be a burden later on, especially for newer businesses.

And due to the lack of sufficient capital, company growth will substantially slow down. As it would be hard for them to expand their business, introduce new products/services, or invest in R&D without enough money to spare. Also, if it’s a competitive market, the company might end up losing its customers and could potentially go out of business.

Now, let’s talk about the overall economy.

Economy and the stock market

Many of the largest publicly traded companies we see today grew their businesses using the funds they raised from the public through the stock market. And these companies might not exist today if it wasn’t for an active stock market and a large number of enthusiastic investors.

When these companies grow, naturally there will be more revenue, which means they’ll hire more people, which will grow the business. All of this means that the government will receive more money in taxes.

Don’t believe me? Check this out;

The US government received $230.2 billion in corporate taxes, in FY2019. Most of that money could disappear if there was no stock market.

So no stock market means fewer jobs, less income, fewer taxes, all of which will result in a weaker economy.


Financial markets are viewed as an indicator of the overall economy of the country; an active stock market shows a robust economy and vice versa. An active stock market can help individuals grow their wealth and companies grow their businesses.

To know more about how you can grow your wealth through investing, check out our bestseller The 8-Step Beginner’s Guide to Value Investing.

Investing vs saving; Which one should you choose?

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for”

– Robert Kiyosaki

Whether you’ve got your first paycheck, or you’ve been earning for quite a while and you want to start working on your finances, it’s likely that you’re deciding between saving vs investing. How much money should you invest, where should you invest, is investing safe – are some of the questions that come up when confronted with the choice of saving or investing

So let’s break it down.

What is considered Saving?

Saving is when you set aside money in safe accounts or securities with virtually no risk. The objective is to save as much as money and keep it secure for future use. As long as you don’t make any withdrawals, the dollar amount in a savings account will not decrease. Also, your savings are a liquid option, meaning the cash is readily available, at your time and place.

A bank account, for example, is virtually a no-risk option when it comes to putting your money, besides you can access your money whenever you want.

Why should you save?

One might think that saving money isn’t really necessary when you can always get things on credit using credit cards or personal loans. And you’re right – you can buy things using your credit card and it’s quite easy to avail yourself of a personal loan when you have a bigger purchase to make.

However, with every purchase you make using your credit, you’ll end up paying more money than the cost of the product since there’s added interest for the money you borrowed. Whereas if you had enough money in savings, you only need to pay the cost of the product, nothing more. It might take a while to have enough money in your savings to make a bigger purchase – like a car. But it’s worth the wait.

Where should I save?

When it comes to savings, these are the most popular options

  1. Savings account
  2. Checking account
  3. Treasury Bills
  4. Certificates of Deposit (CD)

Keep in mind that, with Treasury bills and CDs there might be a minimum time period for which you should not make any withdrawals to get interest on your money. If you make an early withdrawal, you might have to pay a penalty, and you probably won’t earn any interest.

What is considered investing?

Investing is the act of committing your money or capital to an asset hoping to generate a profit. It is similar to saving, in that you’re preserving money for future use. But the difference between saving and investing is that, with investing you’re trying to get a higher rate of return on your money by allocating it to certain assets.

Generally, a profit from an investment would be through capital appreciation or active income. Capital appreciation is the increase in value of the asset over time – if you had bought Apple stock at $70 and waited a couple of years and sold it at $140, you’d have a profit of $70. Active income from investing will be in the form of dividends (stocks) and rental income (real estate), etc.  Remember, not all assets provide you with an active income.

The goal of investing is to grow your money. For that, you need a high rate of return on your capital. The rate of return varies from asset to asset. But keep in mind that this is not a guaranteed rate of return. When it comes to assets like stocks, there are no guarantees.

However, historically, stocks have appreciated in value. On average, the stock market has produced an annual return of 13.9% in the past 10 years (2011-2020). For context, the average annual rate of return on a savings bank account is around 0.04%.

Why should I invest?

Before I answer this question, let me tell you what inflation is. Inflation is an aspect of the economy that results in a decrease in the value of money over time. Inflation leads to a decrease in the purchasing power of the currency – most of the products you could buy with $10 in 2010, can’t be bought with the same amount anymore.

The inflation rate is around 2% a year in the US. Whereas the interest rates for a savings account are close to zero. So ‘saving’ all of your money is not a good idea.

Investing helps you beat inflation. If you look at S&P 500, an index that tracks the prices of the largest 500 companies in the US, had an annual rate of return of 13.9% in the past 10 years. This shows not only you beat inflation, but you also managed to grow your money.

So to answer your question, investing allows you to grow your money over time, despite inflation.

Where should I invest my money?

These are the most popular options when it comes to investing:

  1. Equities
  2. Bonds
  3. Funds – mutual funds, ETFs, etc.
  4. Real estate

Stocks are one of the most popular investment options. Investing in stock is the best way to grow your wealth over the long term. The stock market has consistently appreciated in value-generating profits of millions of dollars, for thousands of individual investors.

Consider this – if you had invested $10,000 in an S&P 500 index fund in 1993, it would be worth $95,370 today (as of 26 May 2021).

Saving and investing

Now we know what is considered saving and investing. The next question you might want to ask yourself, when should you invest and when should you save?

Well, that depends.

It is up to the individual to decide as per their financial goals, time horizon, and risk tolerance.

As a general rule, saving should come before investing.

There are a couple of reasons behind this. The first being, the money to invest should come from your savings. It makes sense, right? Savings should be the capital that fuels your investments. The last thing you want to do is to borrow money to invest.

Secondly, in the occurrence of an emergency where you require money on an immediate basis, you shouldn’t be in a position to sell your investments to raise cash. Since markets tend to be volatile in the short term you might end up selling your investments for a loss. To quote the legendary mutual fund manager, Peter Lynch – “When you sell in desperation, you always sell cheap”.

So you should ideally have an emergency fund. Also, the emergency fund should be able to cover all of your essential expenses for at least three to six months. And no, your investment is not your emergency fund. Even then, at the time of an emergency, you might be forced to sell your investment, if you’re short on savings. To avoid being in such a position, make sure you have your emergency savings ready.

Also, make sure you pay off your debts, especially ones with high-interest rates. Even though what is a high-interest rate depends on the individual, make sure to pay off anything with an interest rate above 10%. That includes credit card debt.

Another area you should take care of before you start investing is retirement planning. Whether it’s your 401(k), or IRA, make sure you invest and max out your retirement account. Especially if your employer adds a matching contribution. As these are retirement accounts have tax advantages, you’ll likely end up with a substantial amount of money.

Once all of these are in place, you can start investing.

When should you invest?

Invest for the long term.

Any amount of money that you reckon you wouldn’t need in the short term is worth investing in. As for when you should invest, start as early as possible. Because time is an important factor when it comes to investing. If you give more time to your investments, the returns will compound and then you’ll end up with a significant amount of money.

Invest for long-term goals that you don’t have a specific time horizon in mind, or you’re flexible with the timeline. The reason is, if the market is in a downturn when you’re thinking of withdrawing your money, you should be able to delay it for a while. So you can sell out when investments return to a higher value.

When should you save?

Save for everything that is short-term.

That means if you think you’ll need the money in six months, or a year or even five years, save it. Buying a house, for instance, is a short-term goal, as you plan to do it within a year. The money you need for this should be kept in savings, as you can’t predict when the market might go down, and if that coincides with your house purchase, you might be forced to sell your investments at a loss.

Saving vs Investing

All that being said, you need to look at the downsides as well. Should you go all-in on savings? That’s a bad idea. The interest rate on savings accounts is so low, you’ll end up losing the value of the ‘saved’ money over time, due to inflation.

How about investing all of your money? Not a particularly good idea. If you invest all of your money, you’ll be running short on cash for your short-term expenses, even for essentials.

Ideally, it should be a combination of saving and investing – you save first and then you invest. The allocation of how much to invest and how much to save is totally up to you. As I said, it depends on your priorities, circumstances, financial goals, and risk tolerance.

Know that investing isn’t that hard. If you’re someone who doesn’t have time to spare, you can buy an index fund and still get the average market return. But if you put in some time and effort, you can achieve substantial returns in the long run.

For a headstart, check out our Amazon Bestseller The 8-Step Beginner’s Guide to Value Investing.

Frequently asked Questions

Is it better to invest or save?

Ultimately it is up to each individual to decide. As a rule of thumb, you should ideally save first, and invest a certain portion of your savings.

Which is more important savings or investment?

Both are equally important. Avoiding one for the other isn’t ideal. You don’t need to invest a lot of money. You can start off with as little as $10 or $50, in case you don’t have a lot of money in savings. Remember, the money you invest in is the money that works for you.

How do I start saving and investing?

The key to start is to spend less than you earn. Plan your finances, layout your living expenses, and build up your savings. Even if the contribution to the savings is small, be consistent. Open a brokerage account and start investing small amounts of money, and slowly build up your portfolio.

Investing terms: Important terms every investor must know

Investing can seem intimidating, especially when you’re just starting out. Well, you’re not alone. We have made a list of investing terms for you, as you embark on your investment journey. Here is an introduction to the world of investing and the important investing terms.

General investing terms

Investing: Investing is the act of committing capital to an asset, expecting a profit. The profit could either be through capital appreciation; the increase in value of the asset with time, or it can be through active income from the asset; dividends (stocks), rental income (real estate), etc. In the stock market, investing is generally considered as buying and holding stocks over a period of time, at least 5 years.

Stock: An asset class that represents the partial ownership of a company. When you own a stock, you are owning a portion of the company. It is also known as equity. In investing, the stock is used synonymously with the underlying company. However, it is important to look into the underlying company, which will determine everything about the stock in the long run. For example, Amazon is the company, and the Amazon stock you own represents your ownership in the company.

Share: It is a portion of an asset or security like a stock. When you are buying a stock, you are buying a specific number of shares of the stock, it could be one, a hundred, a thousand, or whatever you want. Let’s take Amazon as an example; you can buy one or a hundred shares of Amazon stock (AMZN).

Ticker: A ticker symbol is an abbreviation used to identify publicly listed stocks on a stock exchange. Remember AMZN? That’s the ticker symbol for Amazon stock.

Portfolio: A portfolio is a collection of investments like stocks, bonds, funds, etc. Every asset you have currently invested in is a part of your portfolio, the investments constitute your portfolio.

Stock exchange: It is the place where stocks are bought and sold. Stock exchanges are institutions that host a marketplace for both buyers and sellers to come together to trade shares with one another. The transactions can only take place during business hours. Each country has its own stock exchange. The largest stock exchange, in terms of the value of companies listed, is the NYSE (New York Stock Exchange). A company must meet a certain set of requirements to be listed on a stock exchange.

Liquidity: The liquidity of an asset is the ease with which it can be converted into readily available cash. The most liquid asset is cash itself, as it can be exchanged for cash or any asset easily. Stocks on major exchanges are generally liquid in nature, so you can buy and sell them, at your time and price. You can also cash it, whenever you want. An example of an illiquid asset is a house, as you cannot easily convert it into cash. You would need to find a buyer who is ready to buy the house at your price, and the whole transaction could take a while to complete.

Market index: It is a hypothetical portfolio of stocks, that represents a section of the stock market. If you’ve heard people talking about how the ‘market’ is performing, they are talking about the index. Because often people see indexes as a representation of the stock market as a whole. The index tracks the prices of a set of stocks. The stocks might be selected based on their market cap, industry, or revenue. S&P 500 is the most followed index in the world. It tracks the largest 500 companies in the US, by market capitalization. The Dow Jones industrial average (DJIA) is another popular index in the US.

Bull market: A bull market is a market that is moving upward, that is rising in value. When someone says they are ‘bullish’ about a stock, it means they expect the stock price to rise.

Bear market: A bear market is a market that is declining 20% or greater. But investors generally use the term to describe a market that is declining in value. Also, when someone says they are ‘bearish’ about a particular stock, it means they think the stock will go down. A bear market generally occurs every six years or so.

Initial public offering (IPO): You might have heard of a company going public. That’s an IPO. It is when the shares of a company are made available for the public to buy for the first time. Once a private company becomes a publicly listed company through IPO, the shares will be available in the public market for investors to trade.

Capital gains: There are two ways by which investors hope to make a profit out of their investments. Capital gain is one of them. Also known as capital appreciation, it is the rise in the value of an asset (stocks) over a period of time. This allows investors to sell the stocks for a price that is higher than the price they bought the stocks for.

Dividend: This is the second way through which investors make a profit out of their investments. Dividends are cash payouts by companies at specific intervals, quarterly or annually (mostly quarterly). This is a way for companies to show their appreciation towards their shareholders (anyone who holds at least a stock share of the company). Shareholders will be paid a certain amount for each share they own. Dividends are an important part of investing as it provides an active income from your investments; you’re being paid just for holding the stocks. It is important to note that not all companies pay a dividend, particularly, younger and fast-growing companies.

Trading: Trading is the process of buying and selling stocks. Mostly, it is used synonymously with day trading. Day trading is the process of buying and selling stocks within a day. Day traders buy huge quantities of shares and hope to sell them within the day for a higher price than they bought them for, and pocket the difference. Day trading is a high-risk option, mainly due to the limited time frame, as they must sell the shares by the end of market hours.

Volatility: It is the degree to which the market fluctuates up and down. When someone says the market is moving up and down, they’re most likely referring to the rise and fall of the market index. The increase and decrease in stock prices are what cause these fluctuations. A volatile market will see constant fluctuations, as the stock prices will move up and down. The more frequent the fluctuations, the more volatile the market. It is to be noted that volatility is a short-term element and in the long term, the market tends to rise in value.

Stockbrokers: A stockbroker is an individual that buys and sells stocks on your behalf. They act as an intermediary between you and the buyer or seller. They often charge a commission for their services.

Full-service brokerages: Full-service brokerages are institutions that act as an intermediary between buyers and sellers and facilitate the transactions of stocks. They also provide services such as financial planning and money management. They often charge comparatively high fees.

Discount brokerages: These are generally online trading platforms that facilitate the buying and selling of shares. Unlike traditional brokerages, they only charge a small amount as commission. Some discount brokers provide zero-commission trades which means you don’t need to pay anything to buy or sell shares. Popular discount brokers include TD Ameritrade, Charles Schwab, E-Trade, etc.

Brokerage Account: You need a brokerage account to buy and sell stocks, bonds, funds, etc. It works similarly to a bank account. This is an account you open either with a full-service brokerage or a discount brokerage. This account will hold all your current investments. On opening a brokerage account, you can electronically transfer funds to the brokerage account, and use the fund to buy stocks. On placing orders to buy stocks, the brokerage will execute the order on your behalf, and deliver the stocks to your account.

Rate of return: It is the net gain or loss of an investment over a period of time that is expressed as a percentage of the initial investment. In other words, it is a measure of the profit or loss you have made relative to the money you invested. If you bought a stock at $50 a share and held it for a year, and the price rises to $80 in that time, you would have made a profit of $30 a share. If you divide the profit, by the initial investment, and multiply by 100 you get the rate of return of your investment. In this case that would be 30/50 multiplied by 100, which is 60. Hence for an investment of $50, you had a rate of return of 60% in a year.

Intrinsic value: Intrinsic value is a measure of how much an asset is worth. Intrinsic value takes into account tangible and intangible factors of the assets, to determine a value that accurately reflects its worth. In the case of stocks, investors study the fundamentals of the company; financial statements, corporate performance, management, industry, etc. to determine its intrinsic value. More often, it is different from its market value, as market value is more about how the stock market perceives the stock, which might take into account factors such as supply and demand from investors.

Ways of investing; terms you should know

Apart from individual stocks, you have plenty of ways you can invest in the stock market. From a low-cost index fund to a financial derivative, here’s everything you need to know.

ETFs: Exchange-traded funds (ETFs) are funds that track a market index, sector, commodity, or asset. But you can buy a share of an ETF, just like you buy a stock. Let’s say you want to invest in marijuana companies because you know they will make a lot of money. But you don’t know which marijuana company to buy nor have the time to research and study marijuana companies. So you can buy an ETF that holds shares of marijuana companies. Now, instead of one company, you have invested in several different marijuana companies.

Index fund: An Index fund is how you buy an index. Similar to ETFs, they track a particular index and attempt to mirror the performance of the underlying index (the index that it tracks), by buying shares of all the stocks in an index. Index funds are passively managed, which means there are no fund managers actively changing the holdings according to market conditions. Instead, the fund merely adopts the changes in the underlying index.

Mutual fund: Mutual fund is a fund that pools money from individual investors and invests in different assets like stocks, bonds, commodities, etc. A mutual fund is managed by finance professionals (generally referred to as Fund managers or Portfolio managers), who actively make changes in the investments in order to ‘beat’ the market. However, mutual funds tend to underperform the market in the long run. A 2018 report from S&P Dow Jones Indices suggests that more than 92 percent of active mutual fund managers in large companies were unable to beat the market over a 15-year period.

Hedge fund: Hedge funds pool money from rich investors. I say rich because there is a minimum investment amount, that is comparatively higher. Hedge funds use the pooled money to engage in a wide range of investment activities. They often use borrowed money to amplify their returns. Besides, the fund managers charge huge amounts of money in management fees. Due to the risky nature of hedge funds, the government has put in a number of regulations, which makes it hard for a regular investor to invest in hedge funds.

Expense ratio: It is a measure of how much of a fund’s assets will be used for administrative and operating expenses. Basically, it is the percentage of your money you need to pay when you choose to invest in a fund. For example, if you invest $10,000 in a fund with an expense ratio of 0.5%, you would need to pay $50 annually for the associated expenses. Generally, index funds and ETFs have a lower expense ratio compared to mutual funds, as index funds are passively managed. Remember, the higher the expense ratio, the less the returns.

Bonds: A bond is similar to a loan. When you invest in a bond, you’re lending money to the government or a company, with a promise that you’ll be returned the principal amount along with interest. The time period for which you’re lending money is the maturity date, on which the bond is matured and the borrower should give you back the money with interest. There are different types of bonds including Treasury bonds issued by the government and bonds issued by companies, known as corporate bonds. Bonds are generally considered to be a ‘safe’ investment as it promises a fixed rate of return.

Commodities: A commodity is a raw material that can be bought and sold. Commodities are generally categorized into two; hard and soft. Hard commodities are those which are mined or extracted; gold, oil, rubber, etc. Soft commodities are agricultural products such as coffee, wheat, sugar, etc. Investing in commodities can be done either through buying shares of companies that are directly involved in the commodities or by investing in commodity futures contracts.

Derivatives: A derivative is a financial security that derives its value from an underlying asset. The underlying asset could be stocks, bonds, commodities, etc. Derivatives are generally used to mitigate risk. Derivatives derive their price from fluctuations in the underlying asset. Consider an oil company that agrees to buy 100 barrels of oil at $50 a barrel from a supplier. Here the oil, a commodity, is the underlying asset and the futures contract between the oil company and the supplier is the derivative.

Asset management company (AMC): It is an institution that invests capital on behalf of its clients. They generally manage everything from high-net-worth individual portfolios to hedge funds and pension funds. They often create mutual funds and ETFs to cater to individual investors. Some famous asset management companies in the US include Vanguard Group and Fidelity Investments. AMCs charge their client a percentage of the assets the company manages for the client – assets under management (AUM).

Alternative assets: These are assets that do not come under the traditional asset classes like stocks, bonds, or commodities. It could be collectibles, antiques, rare stamps, or coins. These assets are traded infrequently and hence are illiquid. However, cryptocurrencies are another alternative asset that has high liquidity. These are digital currencies that can be used to make purchases. Bitcoin, the most popular cryptocurrency, is currently traded at $60,792.00 per coin.

Risk Management: It is the process of understanding, analyzing, and mitigating potential risks to your investment portfolio. As every investment involves a certain amount of risk, investors perform risk management to reduce risk as per their level of tolerance. Generally, investors do this by diversifying their assets, choosing stocks that are less volatile (blue-chip stocks), etc.

Asset allocation: It is the process of allocating your assets according to your risk tolerance (a measure of how much risk you can take on), investment goals, and time horizon (how long do you plan to stay invested). This is done to balance risk and reward by focusing on the overall portfolio. Diversifying assets across different asset classes, different geographies, companies of different scales (smallcap, mid-cap, and large-cap) is a method that is commonly used in asset allocation.

Financial advisor: A financial advisor is a professional who provides financial advisory services to their clients for compensation. Their services generally include financial planning, investment management, and tax planning. After understanding the client’s financial situation and goals, a financial advisor devises an investment strategy for their client that is tailored to their investment goals and horizon. Basically, they tell their clients what, when, and where to invest.

Investment terminology; companies

These are investment terms that are associated with a company and its business. Having a basic understanding of these terms will help you in finding the best company (stock) to invest in.

Outstanding shares: These are stock shares of a company that is currently held by all shareholders, including shares held by institutional investors and company insiders. Outstanding shares are used to calculate the market value of a company referred to as market capitalization.

Market capitalization: Commonly referred to as a market cap, it is a measure of how valuable a company is, according to the stock market. Market cap is the price of one share multiplied by the number of outstanding shares. Consider a company whose stock price is $100 per share, and it has 10 million shares outstanding, which means the company has a market cap of $1 billion. As per the market cap, companies are categorized into small-cap ($300 million to $2 billion), mid-cap ($2 billion to $20 billion), and large-cap ($20 billion to $200 billion), mega-cap ($200 billion or more)

Enterprise value: While market cap is the value of a company as seen by the stock market, enterprise value is the total value of all assets and liabilities of the company. It is basically what you need to pay if you wanted to buy the company in whole and have 100% ownership. Apart from the market cap, it also takes preferred stock (a special class of stock that offers benefits such as larger dividends), debt, and cash reserves into the account. To calculate the enterprise value, add a market cap, preferred stock, and outstanding debt together and subtract cash and cash equivalents found on the balance sheet. You subtract the cash because once you acquire the company, the cash is yours.

P/E ratio: Price-to-earnings (P/E) ratio is the ratio of the company’s share price to its earnings per share (EPS). Earnings per share is the total profit of a company (earnings) divided by the number of shares outstanding. If a stock trades at $50 per share, and its EPS is $5, then its P/E ratio is 10.

P/B ratio: Price-to-book (P/B) ratio is the ratio of a company’s share price to its book value – which is the total value of all assets of the company. Typically, a ratio less than one is ideal. However, many newer companies (especially software/technology companies) have a higher P/B ratio, as more of their value derives from intangible assets which cannot be quantified on their balance sheet. Because if the stock price is lower than the book value of the company, the stock might be undervalued.

Free cash flow: Free cash flow is the cash left after paying for all the expenses including operating expenses and capital expenditures – which are used to purchase, maintain, or upgrade physical assets. If a company is generating free cash flow, it means the company has plenty of cash to invest in future business, pay off debts, or pay dividends to shareholders.

EBITDA: EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is a measure of the overall profitability of a company and often used as an alternative for net income. EBITDA can be calculated by adding net income, interests, taxes together with depreciation and amortization expenses.

Dividend yield: Dividend yield is a measure of how much a company pays its shareholders in dividends each year, relative to its stock price. If a company’s stock trades at $100, and they pay a dividend of $5 per share, then the dividend yield would be 5%. It is important to note that a higher dividend yield is not always ideal, as it might be a result of a decline in the stock price. While looking at dividend yield, you should ideally check whether the company has consistently paid dividends in the past.

EV/EBITDA: EV/EBITDA ratio is enterprise value (EV) divided by earnings before interests, taxes, depreciation, and amortization (EBITDA). It is also known as EV multiple. The ratio is used to compare the value of a company including money it owes, to its earnings less non-cash expenses.

Income statement: An income statement is a financial statement that shows you the financial performance of a company over a period of time – a quarter or a year. It is one of the three most commonly used financial statements (the other two being balance sheet and cash flow statement) that conveys the financial position of the company. The income statement shows you how profitable the company was during the reporting period. It shows the revenue, expenses, and profit of the company during the period.

Balance sheet: A balance sheet is a financial statement that basically shows what the company owns and owes, along with the amount invested by shareholders. The balance sheet reports the company’s assets, liabilities, and shareholders’ equities at a given point in time. Investors look at balance sheets to derive various financial ratios to understand the financial position of the company.

Cash flow statement: A cash flow statement is a financial statement that reports the movement of cash into and out of the company during a given period of time. It gives you an idea, of where the money comes from and how it is being used. Free cash flow in the cash flow statement, is a measure you can use to determine the profitability of a company. Because the more free cash the company has left, that can be used to expand the business, or return to shareholders, after paying dividends and paying off debt.

Form 10-K: It is a detailed report published annually by every public company. The Securities and Exchange Commission (SEC) requires every publicly listed company to publicly disclose all the information that surrounds the company, including the recent financial performance and the risks faced by the business. It is much more detailed than an annual report, which is a report that is sent to all the shareholders before the annual meeting. You can find all the information about the company in a Form 10-K; from how the company makes and spends money to the risks they currently face, everything you need to know about the company can be found in Form 10-K.

Fundamental analysis: Fundamental analysis is the process of studying business fundamentals and financial statements to determine the intrinsic value or ‘fair market value’ of a company. This is done to understand whether the stock is undervalued or overpriced. Investors and analysts look at the financial position of the company and other business fundamentals like overall industry, competitive advantage, management of the company, business model, etc. for fundamental analysis.

Brokerage terminology: buying a stock

These are investment terms you should know before you buy your first stock. It starts with the type of order you should choose when you buy a stock. Generally, there are two options; market and limit order.

Market order: A market order is selected when you want to get the stock as soon as possible for the current price. Market order puts no parameters on the share price, so the order will be fulfilled immediately. Since price fluctuations happen all the time, there might be a slight difference between the price you saw when you selected the stocks, and the price you paid. This price difference is negligible for an investor who plans to buy and hold these stocks for a long time. Investors generally use market orders as their priority is the completion of the trade.

Limit order: Limit order focuses on the price at which the trade should be executed. You have more control over the price with this order. Let’s say the stock Brookfield Asset Management (BAM) is trading at $50 per share. But you want to buy the shares at $48. With a limit order, you can set the price at $48, and the order will only be completed, once the price drops to $48 from $50. If you’re selling, you can set the price above the current price, say $52, and the trade will only complete once the price climbs to $52. Limit orders are mainly used by day traders, for whom even the slight fluctuations in the share price matter a lot.

Stop order: This is an order to buy or sell a stock, where you can specify a price, and on reaching the price, the trade will be executed at the next available price. The price you specify is referred to as the ‘stop price’. Consider Dell (DELL) trading at $100. If you think DELL is going to go up, but you want to buy it only, if and when it crosses $105, you can set the stop price to $105. Once it crosses $105, the order will be executed as a market order, which means the order will be fulfilled immediately at the available price. If you’re selling a stock, the same can be done, only you’ll set a price lower than the last traded price, and on crossing the price, the stock will be sold immediately. This is often used by investors to mitigate loss, hence it is referred to as a stop-loss order.

Trailing stop order: Similar to a stop-loss order, this type of order can be used to buy or sell a stock, the difference is the stop price moves when the stock price moves in your favor, and it stays at the stop price when the stock price moves against you. To explain this better, imagine you’re selling Dell (DELL) trading at $100, and you set trailing stop at $99. If the stock price goes up to 101, the trailing stop would move to $100. However, if the stock price lowers to $100.50, the trailing stop won’t move. If the price drops again to $100, the order will be converted to a market order and fulfilled immediately. A trailing stop order is mainly used by day traders as it helps them to lock in the profits while protecting them from any losses.

Bid and ask: Every time you want to buy or sell a stock, you can find the bid and ask the price for that particular stock. The bid price is the maximum amount a buyer is willing to pay for the stock share. The ask price is the lowest price at which a seller is willing to sell the stock share.

Margin: Margin refers to the amount of money you borrow from your brokerage firm to buy an asset. It is similar to availing a bank loan, only here, your investment portfolio will be the collateral, and your brokerage is the lender. Just like a bank loan, you’ll need to pay interest for the borrowed money. Leverage incurred from margin can amplify your losses and could lead to the brokerage acquiring your portfolio, without prior notification.

Retirement investing

Here you have terms that are related to investing for retirement.

Traditional IRA: It is a traditional Individual retirement account where you can save money for retirement. Anyone over the age of 18 with a job can open a retirement account, however, some retirement accounts have specific requirements. IRA offers tax advantages, and traditional IRAs are tax-deductible. That means the contributions you make to these accounts won’t be considered as your taxable income. If you earn $100,000 a year and contribute $20,000 to your IRA, you’ll only be taxed for $80,000. With a traditional IRA, you’ll only be taxed when you start withdrawing money from your IRA account.

401(k): This is a common retirement account offered by many employers to their employees. Similar to traditional IRA, contributions to 401(k) are also tax-deductible. Also, it allows you to invest money in stocks or mutual funds. Employers often match contributions, with up to 50%. The money is only taxed when you start withdrawing it, which you can only access when you are 59.5 years old.

Roth IRA: Roth IRA is a type of retirement account that offers some great tax benefits. Unlike traditional retirement accounts, you need not pay taxes on the money you withdraw from the Roth IRA. Also, the profit you make from the investments held within the Roth IRA, is tax-free, even when you withdraw those profits. You can invest in stocks, bonds, and other securities within the Roth IRA. Note that the contributions you make to the IRA are post-tax, which means you are already paying taxes for that money.


You’re right. Investing can be quite complicated at times. But we’ve got you. Understand all these terms, and you’re off to a great start. Even if you don’t understand everything in the beginning, it’s fine. Start small, buy your first stock, learn a little every day, and you’ll be good.

If you’re still not sure, whether or not should you start, it might be because you’re missing an investment strategy. Maybe you should try value investing. It is an approach where you buy stocks that are currently trading for less than their intrinsic value. Legendary investors like Warren Buffett used the value investing strategy that made him one of the richest men in the world. Learn more about value investing with our Amazon Bestseller The 8-Step Beginner’s Guide to Value Investing. 

Is investing gambling? Understanding the difference

To answer the question, ‘Is investing the same as gambling?’ First, we should look at what exactly is investing and gambling.

Gambling and investing

Investing is the act of committing capital to certain assets, expecting to make a profit. Let’s take the stock market for example; you put money in stocks and hold those stocks for years, and sell them later for a higher price than you bought the stocks for. Capital appreciation and active income (dividends and interests) are two ways by which you can make a profit out of your investments.

Gambling is staking money on an event whose outcome is uncertain and mostly involves chance. Gamblers hope to make money by betting on the ‘most likely’ outcome, even though generally it is a random chance. A flip of a card, a roll of a dice, the outcome of a sports game are some of the most common gambling events.

Investing vs gambling; similarities 

Now, that you know what each of these is, let’s look at some common characteristics both have.

Investing and gambling are, essentially, you risking your money for future profit. And both investing and gambling have risks associated with them. However, the risks are quite lower in investing when compared to the risk associated with gambling. Also, whether you want to invest or gamble, you have plenty of options to choose from; different asset classes (stocks, bonds, funds) in investing and different betting events in gambling (casino games, horse races, sports games).

Generally, both involve a certain amount of fees to be paid regardless of whether or not you make a profit; ‘points’ in gambling which is charged by the body/organization that hosts the bets, and ‘commissions’ charged by the brokerages when you buy or sell shares. Another characteristic that both investors and gamblers share is information, particularly information on the outcome of the investment/gamble.

As an investor, you want to know the past performance of stocks, financials, and fundamentals of the company. Gamblers, on the other hand, look for information regarding the most frequent outcome of the event. If it is a football game, gamblers learn more about the teams; their past performance, the line ups, etc. It’s easy for investors to find information on stocks, but gamblers, usually have a hard time finding information about the likely outcome of the gambling event, which often leads them to fully rely on chance.

Investing vs gambling; differences

Even though gambling and investing share some similarities, there exist a lot of differences between these two.

Research vs luck

Investing is a planned activity performed with a specific goal in mind. A lot of research goes into investing. The past and estimated future performance of the stock, risk tolerance, financial goals are taken into account while investing. Investors analyze the fundamentals of the underlying company before investing in the stock; financials and business fundamentals are studied closely to make sure the stock is suitable for the investment strategy. The strategy is prepared with a specific goal and time period in mind – saving up for retirement, increasing long-term wealth, children’s education, etc.

Gambling, however, mostly involves chance and speculation. Gamblers are staking money on an uncertain outcome. Gamblers have no way of predicting the outcome of the random event on which they have staked their money, and it mostly depends on luck. Consider the rolling of a dice. In the case of an unbiased die, all six outcomes have equal probabilities, and the gambler could win or lose money based on the outcome.

The risk factor

Investing involves risks – nobody can deny that. However, there are a lot of ways you can mitigate risk in investing. You can have a diversified portfolio, dividing the risk into different asset classes and industries. Moreover, even if you lose money in investing, you can always get it back- either by using a different investment option or just by waiting for the stock to go up. And you can always take out your money and put it elsewhere, even with a small loss. In investing, it’s highly unlikely that anybody will lose all of their money, only partial losses. Even the partial loss occurs only when you sell stock. So if you can hold on to those stocks, you might get a chance to sell them for a profit later.

However, in gambling, there is no way to mitigate risk – and the risk is exponential. Because gambling follows an all-in strategy; when you bet on something, you either win and get rewarded or lose all of your money. And there is no way to get that money back. If you bet on a certain horse at a horse race, and the horse does not win the race, it does not matter if the horse got the second position, you’ll lose all your wager. If you plan to get back the money you lost by playing again, you still have the same chance, and moreover, now you could lose additional money. In gambling, the probability of losing money is higher than the probability of earning a profit.

Investing vs gambling; Long term vs short time

This is a major difference between gambling and investing; one is short-term and the other is long-term. Investing is usually done in years or decades even. Because the basic principle behind investing is the more time you allow your investments to grow, the more valuable they will be. Gambling, on the other hand, is a short-lived activity – a couple of minutes, few hours, or even some days.

Due to the lesser time available with gambling, you seemingly have no way to claim your money if you see that you are losing the bet –  the bet is over once the game or hand is over. Within this short period of time, you either lose all your money, or you win some. Also, in gambling ‘the house’ always has an edge – a mathematical advantage over the gambler that increases the longer the gambler plays. Whereas, in investing the stock market tends to appreciate in the long term. Between March 1980 and March 2021, the S&P 500 had a total return of 10344.471% (dividends reinvested), an average annual return of 12%. This means, if you had invested $1000 in 1980, you’d have $104,218 by 2021. So if you keep at it, the odds will be in your favor as an investor, and not in your favor as a gambler.

With investing, you’ll also be rewarded for the time you commit the capital to a particular stock, which means, you’ll be paid just for holding the stock. And that brings us to the next distinction.

Ownership; nothing vs something

When you gamble, you own nothing. You merely stake money on a random outcome of an event.

When you invest in a stock, you own a share of the underlying company, which means you are a shareholder in the company. Most companies reward their shareholders for the risk they take by committing the capital, in the form of dividends. These are cash payouts paid to the shareholders in specific intervals for each share the investor owns. That way, you’ll have active income just from owning those stocks.

Instant gratification

In gambling, there is always instant gratification or instant disappointment, depending on the outcome – you win, or you lose. So that leaves you no room for error.

With investing, there is no instant gratification. You’re in it for the long term. On the bright side, that gives you plenty of time to improvise if something goes wrong. Say, in one of the stocks you own, the underlying company is on the verge of bankruptcy, you can still get out and put that money elsewhere.

Addiction vs the healthy way

Gambling can be addictive; the notion of doubling or tripling your money is certainly attractive. That might even happen once or twice, which will persuade you to stake all of your money on the next bet – because we are human beings, and it can be difficult to resist those temptations. Most likely, you’ll lose that bet, thereby all of your money. Some gamblers would be adamant to win their money back, so they’ll keep playing, till they get their money back. But most end up without a penny.

Investing is a proven and healthy way to build wealth in the long run, as the stock market tends to appreciate over time.

Why shouldn’t you gamble?

For all the reasons above, you shouldn’t gamble with your money. There is a high chance that you’ll lose all of your money then make a profit. You might win some in the short term, but you’ll lose in the long run.

Is investing a form of gambling?

The answer is no.

Just because returns are uncertain with investing, that does not make it gambling. Investing gives you ownership of an asset with the potential for capital appreciation (increase in value of the asset over time). You might even be rewarded while you wait, in the form of dividends or interests. Whereas gambling is staking money on the outcome of an event – which is uncertain, highly risky, and you won’t own anything.

That being said, there are investors who gamble with their investments. Some of them buy and sell huge quantities of shares in a single day (referred to as trading), and some bet on stocks to go down (shorting). These are high-risk options and not sustainable in the long run. Also, there are investors who just buy ‘hot’ stocks, without understanding what they are getting into – which is simply gambling, but with stocks instead of horses or cards.

So if you want to start investing, make sure you start off on the right foot. Read how you can start buying stocks and what you should keep in mind.

Why should you invest?

Investing in the stock market is an efficient way to beat inflation. Inflation is the decline of purchasing power of a given currency over time. It can also be seen as the increase in the price of goods and services for daily consumption. To put it into perspective, say you add $10,000 into savings every year. In 5 years you’ll have $50,000, but that’ll only be worth 47,500, assuming the inflation rate is 5% a year.

However, if you invest $10,000 in an index fund with an average annual return of 10%, in 5 years, you’ll have $58,370, which will be worth $55,870, assuming that you’ll invest $10,000 in the four consecutive years and the inflation rate is 5% a year. Not only did you beat inflation, but you also managed to level up your personal finance game.

Investing is also a proven way to build long-term wealth. If you had invested $10,000 in the S&P 500 index in 1980, the investment would be nominally worth approximately $978,858.45 in 2021. This is a return on investment of 9,688.58%. Legendary investors like Warren Buffett build their wealth from stocks, using an investment strategy known as value investing. It is an investment strategy where investors look for stocks that currently trade for less than their intrinsic value.

Frequently asked Questions

Is the stock market basically gambling?

No. On the contrary, investing in the stock market is a proven way to build long-term wealth.

Is stock trading a form of gambling?

Day trading is buying and selling shares on the same day. Due to the high-risk nature of trading and the potential to lose a lot of money, it is often compared with gambling. Like gambling, day trading is not sustainable in the long run.

If you would like to learn more about value investing, try our Amazon bestseller The 8-Step Beginner’s Guide to Value Investing

What is penny stock; Should you buy it in 2021?

What is a penny stock?

If you’ve ever watched the movie ‘The Wolf of Wall Street’ you might be familiar with penny stocks. ‘Pink sheets’ and ‘penny stocks’ were how Jordan Belfort notoriously made millions. Don’t get me wrong, he never bought any penny stocks. All he did was sell penny stocks, that were worth nothing, to investors for huge prices and make money through commissions. Let’s start with what penny stocks are.

Penny stocks are stocks that trade for, if not a penny, a small amount. Generally, they are considered as any stock that trades under $1 a share. However, according to the Securities and Exchange Commission (SEC), penny stocks are stocks that trade under $5 per share. While some penny stocks are traded on stock exchanges like NYSE (New York Stock Exchange), penny stocks are more often traded on the over-the-counter (OTC) markets. Generally, penny stocks are shares of smaller and relatively new companies. Penny stocks are less liquid in nature, which means they are not bought and sold frequently. OTC markets group that frequently trade penny stocks include OTCQX, OTCQB, and OTC Pink.

What is the difference between a penny stock and a small-cap stock?

To understand the difference between a penny stock and a small-cap stock, let’s look at how they are defined. While a penny stock is defined on the basis of its share price, a small-cap stock is defined on the basis of its market capitalization (used to represent the value of the company). Smallcap stocks are companies with a market cap between $250 million and $2 billion.

Both penny stocks and small caps have small market caps, however, penny stocks are mostly traded on over-the-counter markets such as OTC Bulletin Board, whereas small-cap stocks are traded on major market exchanges like NYSE and NASDAQ. Even though there are stocks trading on NYSE and NASDAQ with share prices lower than $5, they aren’t generally considered penny stocks.

Why should you stay away from penny stocks?

Penny stocks attract a lot of investors mainly because they are cheap. A lower share price means investors can buy a lot of shares for less money. Investors, especially novice investors look at penny stocks as means to make a lot of money with a small initial investment. However, most fail to understand the risks associated with investing in a penny stock company. Let’s look at some reasons why investors shouldn’t buy penny stocks.

Low liquidity

The liquidity of an asset or an item is the ease by which an item can be converted into cash. The more liquid an asset is, the more easily it can be converted into ready cash.

Stock shares of large companies have high liquidity, meaning you can buy and sell them easily, at any time. However, penny stocks have very low liquidity. Primarily because they are traded infrequently, and the trading volumes are low. Once you acquire some penny stocks, you might not be able to sell them at your price or time, due to the low liquidity. You might have to lower your ask price until a buyer is interested in buying at that price. More often that leads to huge losses if you’re selling off large positions. This is even worse when the price is low. It’s highly likely that you will end with a whole junk of worthless stocks. Low liquidity will also result in a high bid-ask spread (the difference between the prices quoted for an immediate sale and an immediate purchase), which will result in a higher transaction cost.

Lack of information

Company valuation is a major part of investing. An investor can make better decisions through due diligence when they have the financial and corporate performance reports on companies, readily available. However, this is not always the case with penny stocks.

Since penny stocks are traded on OTC markets, very little information is available about the penny stock companies. Because, unlike a stock exchange, there aren’t many regulations for a company in the OTC markets. So, OTC penny stocks are not obliged to make their financials and other information regarding the company available to the public. And as most of these companies are new and obscure, it can be very difficult to find reliable information on them. A company might be facing bankruptcy, and you might not know. When there isn’t information available on the companies, the share price becomes speculative, which exposes investors to a lot of scams.

Scams and frauds

The stock market is no stranger to scams and frauds. Over the years, the market has had its share of scams. Investors lost millions over the years through various scams involving shell companies, accounting frauds, Ponzi schemes, and penny stocks.

That’s right! Penny stocks are infamous for scams and frauds. The primary reason fraudsters love penny stocks is their lack of transparency. As I have mentioned before, listing requirements on OTC markets, where penny stocks are traded, are minimum or more often, none. That makes it easier for scammers to manipulate investors, especially inexperienced penny stock investors. One of the most common schemes is the ‘pump and dump’ strategy. Scammers will buy thousands of shares of a rather unknown stock, and they create hype around the stock with false and misleading information to attract investors. You might have come across emails with titles like “HOT PENNY STOCK TO BUY NOW!!!” or “YOU MISSED THE 1000x UPSIDE”, which are mostly these scammers. Once they manage to convince the investors that these are stocks with high ‘potential’, investors will start buying the stocks, resulting in an increase in the stock price. Once the price is high, the scammers will sell off all their shares, earning huge profits, resulting in the steep decline of the stock price. By the time investors realize the truth, scammers would have made a whole lot of money, and investors would be left holding a whole lot of worthless stocks.

Penny stock scams usually involve shell companies, which are legally incorporated but do not have any business operations or assets. De Maison’s scam was a classic pump and dump scheme involving shell companies.

High volatility and risk

The stock market is volatile in nature. The stock prices will move constantly in upward and downward directions in the short term. In the long run, the market generally seems to move in an upward direction.

When it comes to penny stocks, the primary reason most investors choose them as an investment option is the potential upside in the stock price. For example, a penny stock trading at $.0001, and if somebody buys 100 million shares ($10k) and the stock goes up to .0010 they’ll have $100k in profits. It doesn’t always work like that. If it is the other way around, say the stock trades at $.0010 and somebody invests $10k (10 million shares), and the price goes down to $.0001, their investment will only be worth $1000.

Although the risk is inherent with any stock, this highly volatile nature of penny stocks increases the risk exponentially. In fact, the SEC warns investors that if they invest in penny stocks, they “should be prepared for the possibility that they may lose their whole investment”. Also, following the Exchange Act rules of §240.15g-2, the brokers must provide the customer with a standardized disclosure document when an investor wants to buy penny stocks. This document explains the risks associated with buying penny stocks, customer rights, and remedies in cases of fraud.

What should you choose instead of penny stocks?

Investing in penny stocks involves significant risk, exposure to scams, and most importantly, loss of money. Day traders try to capitalize on penny stocks, and they fail more often than not. In fact, only 3.5% to 4.5% of day traders are successful in producing consistent profits for at least several years. For long-term investors, it’s better to stay away from penny stocks, as it can affect your capital gains significantly.

Alternatively, there are other investment options you can choose from. That includes low-cost index funds, etc.

Low-cost index funds

Index funds are passively managed funds that track an index. These funds buy shares of all the companies on the index that it tracks, in order to try and mirror the performance of the index. Unlike actively managed funds, where professionals manage the holdings of the fund, index funds are automated to follow shifts in the value of the underlying index.

This passive nature of index funds results in a lower expense ratio, which typically ranges from 0.02% – 0.09%. Fidelity Zero Large Cap Index (FNILX) would be an ideal option as an index fund, since its expense ratio is 0.0%, meaning you don’t need to pay anything to invest in this fund. Index funds can be a great investment option especially if you are a first-time stock buyer. Additionally, most index funds don’t have a minimum initial investment, so you can start with as little as the share price.

Actually, you can invest with less than that, by buying fractional shares.

Buying fractional shares

A fractional share is a portion of an equity and is less than one full share. Many of the major brokerage firms including Charles Schwab, InteractiveBrokers, Fidelity, SoFi, offer the option of buying fractional shares (TD Ameritrade doesn’t offer fractional share purchases, but it does not matter anymore as the broker has now been acquired by Charles Schwab). This allows you to buy stocks with as little as $5 or $10 dollars. This can be done without paying commissions. Besides, you can get your hands on more expensive stocks like Amazon using fractional shares.

Frequently asked Questions

What defines a penny stock?

According to the Securities and Exchange Commission (SEC), penny stocks are stocks that trade under $5 per share. However, penny stocks are generally considered stocks that trade under $1 per share.

Are Penny Stocks dangerous?

Yes, penny stocks can be dangerous for an investor, as they pose a risk of losing all of their money including the principal amount. Even though a certain amount of risk is inherent with any stock, penny stocks possess a significant amount of risk due to their high volatility.

Can you make money in penny stocks?

Buying (investing and trading) penny stocks is more like gambling. Sure, you could win some. But in the long run, you are most likely to lose all your money. If you want consistently build your wealth, it’s better to stay away from penny stocks and focus on value investing.

Has anyone become rich from penny stocks?

Not really. Many investors became millionaires from owning regular stocks, not penny stocks. Warren Buffet, the legendary investor, focused on value investing where he invested in regular stocks and became one of the world’s richest men.

If you would like to get started with value investing, check out our Amazon-bestseller The 8-Step Beginner’s Guide to Value Investing

First-time stock buyer? Here’s everything you need to know

Welcome to the stock market!

Awesome! You’ve chosen to invest in stocks. Let me show you how you can buy your first stock(s), to start investing. And no, this is not as difficult as you think. In fact, today, it is much easier for first-time buyers.

Now, you can even start investing from your phones!

Also, let me take you through some stock market basics you need to know before and during your stock buying process.

Once again, welcome to the world of investing!

Decide what kind of an investor you are

Let’s start with the duration for which you’ll be keeping the stocks.

Do you plan to buy and sell stocks on the same day? Or would you be willing to hold them for a long time, say more than 5 years? The former, where you buy and sell stocks the same day, is referred to as trading. And, the latter, where you buy stocks and hold them for more than 5 years or so, is referred to as investing. The big players in the game like Warren Buffett, are investors.

Trading focuses on short-term profits. In simple terms, trading is like gambling in a casino. Sure, you might win some money once in a while. But ultimately, in the long run, you’ll lose, and the casino will win. If you’ve ever heard of people losing money in the stock market, that’s usually the traders. Investing, on the other hand, does not focus on short-term gains. It is a way to build your wealth consistently for the long term. Markets tend to have ups and downs in the short term, but in the long run, they consistently rise in value.

For example, between 1990 and 2020, the S&P 500 (a stock market index that tracks the 500 largest companies in the United States) produced a total return of 2,007.31% or 10.33% per year. That means to say if you had invested $100 in the S&P 500 at the beginning of 1990, you would have about $2,107.31 at the beginning of 2020. That’s how investors like Warren Buffet built their wealth over the years, making him one of the richest men in the world.

Another factor to consider is how much time you will spend on your investments after buying stocks. You have the choice to be actively investing – choosing individual stocks, regularly optimizing your portfolio, keeping up with the market, and researching new investments. However, if you can’t spare time for this, you have the option to invest passively – that would be index funds and exchange-traded funds (ETFs). With these passive investments, you can invest your money into any one of these, and forget about it. There is also the option to choose a Robo advisor, wherein an automated system chooses the stocks and invests for you.

Once you decide the duration of investment and your involvement in the process, let’s move on to opening a brokerage account.

Open a brokerage account

To buy stocks, you need a brokerage account. The easiest way is to open a brokerage account online. Most of the major brokerages allow you to open zero-commission accounts, which means there is no commission to buy or sell stocks. Most popular brokerages in the US include Fidelity, TD Ameritrade, Charles Schwab, and Robinhood.

Gone are the days, when opening an account was a real struggle. You had to be present in person at the brokerage office to start an account. Fast forward to today, opening a brokerage account online is as easy as opening a bank account. You fill out the application, provide identification, and transfer funds electronically to your brokerage account – all of this can be done online, even on your phone. Read our detailed guide on How to Open a brokerage account.

Even though most brokerages have adopted a zero-commission policy, be sure to go through the various fees involved. There might be an account maintenance fee and intraday charges, also make sure there are no hidden fees.

Once that is done, let’s pick some stocks for you.

Research Stocks

A good rule of thumb is to buy shares of companies whose products you’ve used, or quite familiar with. As Warren Buffett says “Buy into a company because you want to own it, not because you want the stock to go up”. However, that shouldn’t be the only criteria to select stocks. A good way to start would be reading the annual reports of the company you would like to own. You can find that in the ‘Investor Relations’ of the company website.

These are the types of stocks you can start investing in.

Blue-Chip Stocks

These are companies that have been in the market for a long time and are less prone to market volatility compared to newer companies. These are generally large-cap companies with billions of dollars in revenue each year. It’s highly unlikely that they will be majorly affected by any negative news, hence a less risky option. Walmart (WMT) is an example of a blue-chip stock. With a market cap of $368 billion, they are the biggest company in the world by revenue. It is a good choice for a first stock.

Value Stocks

Value investors focus on understanding a stock’s value by analyzing the fundamentals of a company. The idea is if you can read the fundamentals of the company and understand its financial situation, you can find undervalued stocks that will give you consistent returns in the long run. Value investing is followed by top investors including Warren Buffett and Bill Ackman.

Wells Fargo (WFC) and DermTech (DMTK) are examples of value stocks.

Dividend Stocks

Generally, investors make money in the stock market by selling shares more than they bought them for. The idea is the longer you hold on to your stocks, the more valuable they will be (this is referred to as capital gains). Another way to make money from the stock market is to buy stocks that pay a dividend. These dividend stocks pay small cash payouts to the investors in specific intervals (mostly quarterly) for every share the investor owns. If you are looking to generate active income from your investments, dividends are the way to go. Coca-Cola (KO) and Walmart (WMT) are examples of dividend stocks.

Growth Stocks

With large companies like Walmart, it’s unlikely to see a high growth rate, and while the gains from the stock might be consistent, but it won’t be huge. That’s because they’re already a large business. Hence, there is very little room for high percentage growth. However, smaller companies have a lot to grow. Growth stocks are more volatile than stocks of larger companies, but it often rewards with their high growth, and thus exponential capital gains. While this might not be ideal for a first-time buyer, it can be added to your portfolio, once you get more familiar with stocks.

Decide the number of shares you want to buy

Now that we have the stocks to buy, the next question is, how many shares should you buy?

While there is no minimum number of shares you should buy, and no maximum either, it’s better to start small. Buy a single share of a company just to understand how it feels to own individual stocks. Some brokerages even offer the option of buying fractional shares, so instead of buying a full share of the company, buy fractional shares of several companies. This also allows you to get your hands on rather expensive stocks, like Amazon (AMZN) which currently trades at $2,977. This is also quite useful if you have limited capital or just want to start really small. You can add more stocks to your portfolio over time, as you’ll be constantly learning new things.

Many brokerages including Charles Schwab and Robinhood offer the option to buy fractional shares.

Understand orders

You’re all set to buy your first share. You’ve figured out the stock to buy, and you now know how many shares to buy. Let’s see how you can start buying.

When you select the stocks you want to invest in, you’ll see that you have two options regarding the type of order you can make. Namely, a market order and a limit order. Let’s briefly go over both of these order types.

Market Order

With a market order, you are looking to buy the share as soon as possible, for the available current price. Since the order puts no parameters on the share price, the order will be fulfilled immediately. You might note, sometimes the price you bought the share for isn’t the same as when you made the order. This is because price fluctuations happen all the time. This price difference is negligible for the long-term investor, who plans to buy and hold these stocks for a long time, and hence the priority is to completion of the trade.

Limit Order

Limit order focuses on the price at which the trade should be executed. You have more control over the price with this order. Let’s say the stock Brookfield Asset Management (BAM) is trading at $50 per share. But you want to buy the shares at $48. With a limit order, you can set the price at $48, and the order will only be completed, once the price drops to $48 from $50. If you’re selling, you can set the price above the current price, say $52, and the trade will only complete once the price climbs to $52. Limit orders are mainly used by day traders, for whom even the slight fluctuations in the share price matter a lot.

Since you are buying a share or two, or a few, you can go with a market order.

Optimize your portfolio

Well done! You’re now officially an investor.

That was easy, wasn’t it? As you move ahead in your investment journey, things won’t always be the same. There will be good times when the stocks you own will skyrocket, and there will also be times when you see your stocks losing their value. Understand that every investor, at least once in their lifetime has gone through bad times. The key is to holding on to your investments and looking at the bigger picture, that is the long-term gains. Know that market fluctuations are not something that you can control. That doesn’t mean that you can’t do anything about it.

The first step to get through a bear market (generally used to indicate the market’s downward trend) is to diversify your portfolio. That will act as a protection during times of crisis. Diversifying your investments is investing your money in different asset classes (stocks and bonds), or across different industries (information technology, consumer products, automobile, etc.). As it is highly unlikely that all the markets will go down at the same time, your losses in some stocks will be balanced by gains from other stocks.

Make sure you have an investment strategy based on your risk tolerance (a measure of the risk you can tolerate), as your portfolio grows. A good strategy will ensure that you are consistent with your investments, regardless of the market performance. Dollar-Cost Averaging might be a good starting point. It’s where you invest a fixed amount every month. This will allow you to buy more shares when the market is down and less when the market is up, thereby being consistent with your investments.

Once you are familiar with stocks, it’s time to look at different options for investing. These are some of the most common options investors choose.

1. Exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) are funds that track a market index, sector, commodity, or asset. For example SPY, an ETF that tracks the S&P 500, has shares of all the companies on the S&P 500. The fund tries to mirror the performance of the underlying index. Like an index fund, ETF is also a great way to diversify your portfolio, as buying one share of SPY will give you exposure to the 500 largest companies in the United States.

2. Index fund

Index funds are a type of fund whose holdings track an underlying index. They buy shares of every company on the index it tracks, to try and mirror the performance of the index. Similar to an ETF, an index fund is also passively managed, which means that the investments aren’t chosen by professionals, they just try to mirror the index it tracks. The advantage of passive management is that the expense ratio is very low.

3. Mutual funds

Mutual funds are actively managed funds that take money from investors and invest in various assets like stocks, bonds, commodities, etc. Professionals manage mutual funds, allocate the money in different assets, and make capital gains for the investors. Since the fund is actively managed, the expense ratio is high, compared to ETFs and index funds. Even though they are actively managed, they generally tend to underperform the market.

Remember, stocks are not something you set and forget about. It needs frequent optimization to adapt to changing market conditions. Do your research to find potential growth industries, identify the key players, or companies that could become the key players, look at its fundamentals (financials, management, etc.), and invest.

Keep in mind that information will be abundant. From ‘experts’ on social media to the reporter on your favorite news channel, everyone will have an opinion on what you should buy and sell. Don’t get caught up in those. While it is important to keep up with what is happening in the market, the news should not determine your investment strategy.

Happy Investing!

Frequently Asked Questions

How do I buy stocks for the first time?

  1. Open a brokerage account online
  2. Transfer money to your brokerage account electronically
  3. Search for the company whose shares you would like to buy
  4. Select the order type
  5. Buy

What is a good first stock to buy?

Whether or not a stock is ‘good’ depends upon various factors. A good way to start is to look at the fundamentals of the company i.e financials, management, industry growth, market share, etc. However, if you are not sure how to value a stock, check out this video that explains how we value a stock. Also, for your first stock, you can buy the top companies in the S&P 500 index, which tend to be less volatile and hence a less risky option for new investors.

How much money should a beginner invest for the first time?

While there is not an ideal amount to start investing, try to start with the money you need to buy a single share of a company on the S&P 500. Having said that, you can also start with as little as $100 or even $50, as many brokerages allow you to buy fractional shares, which will be less expensive.

Is it OK to buy 1 stock?

It is perfectly fine to buy just one share of a single stock. In fact, first-time buyers should try buying a single share, just to get a feel of owning a stock, and to understand the stock-buying process. You can add more stocks later on.

How do I learn more about investing?

The internet is a good place to start, as a lot of websites have guides for beginners. However, if you would like to learn how ordinary investors can beat the pros, check out our Amazon bestseller The 8-Step Beginner’s Guide to Value Investing.