Stock Market Lessons From My Father to Me
JEC NASHVILLE — Like many high school students who have interests in the vast world of business, my brother and I have recently become intrigued by the complexities of the stock market. The stock market seemed like a mysterious path to easy money, yet that was the classic beginner’s mistake.
Luckily, at the time, we were both under the age of legally being able to trade in the stock market, also completely ignorant of how one even understands the stock market. After expressing interest in learning, our father gave us two major lessons, along with ample terminology for any beginner trader.
“When everyone is buying, it is a good time to sell”
This quote is a well-known Warren Buffet phenomenon. This quote has a straight forward understanding. As an example, let’s use the current Gamestop scenario: The basic background of this scenario is that major hedge funds (definition #15 below) around the country began short selling (definition #18 below) GameStop. To hurt the wealthy hedge funds, a Reddit feed called “wallstreetbets” persuaded their millions of followers to invest in GameStop. This caused GameStop's stock price to rise from $19.95 on January 11, to a peak of $484 by January 28 (creating extraordinary losses for the large hedge fund corporations). For this example, let’s say Sally bought 50 shares of GameStop, which would cost her roughly $1,000. In a span of roughly two weeks, the stock price spike to $484, making her a pre-tax profit of $24,200. That would be a good time to sell because 50 shares of Gamestop was worth $1,000 on January 11, but now 50 shares are worth $24,200.
“Day trading is not investing”
If you have ever spoken of the word “stock” near a computer, you most likely got advertisements from people on beachfront estates, surrounded by numerous computers claiming, “Do you want to easily make six-figures, while traveling the world? Buy my class to learn more!”
If you don’t learn anything else from this article, just remember this one thing: don’t buy the class. They wouldn’t be running millions of advertisements on YouTube if day trading was actually making them six-figures a year. Not to mention, they are not living on multi-million dollar beachfront estates. It is all a scam.
A person who day trades is someone who buys and sells stocks within the same day. These people quickly buy and sell stocks to earn profits quickly, yet many of which fail. Organizations like the Securities and Exchange Commission (SEC) and the government set numerous regulations for day traders. One of which is massive tax rates. As Roger Wohlner says in his article on the InvestorJunkie, “You could lose your shirt” (A.K.A. you are probably going to lose everything). To be a smart investor, you should make investments for the long run. Mr. Wohlner equates day trading to gambling; if you day trade, “you [are] a high-stakes player at a roulette wheel in Vegas, you could lose your shirt in the blink of an eye.” Warren Buffet said that “calling someone who [day] trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic” (Town 2019).
- Buy and Sell: These two terms were put together because they coincide with each other (not to mention that they are straightforward). Buying a stock means purchasing a percentage of a company. One sells a stock that has been purchased because they have either accomplished their goal, or they are selling at a loss (where they sell their X amount of shares at a lower price than what they bought it for. They are losing money by doing this, but in some cases selling at a loss could save the buyer a lot of money.)
- Bid and Ask: A person’s bid on a stock is the amount of money that they are willing to pay for that stock. An ask is what a person selling their stock is looking to get in return for their shares in that company.
- Bid-Ask Spread: “is the difference between what people have to spend and what people want to get. The spread must be resolved before the transaction can take place”
- Bull Market vs. Bear Market: These terms are all about future expectations of that stock. A bull market is an expectation that the stock prices will rise in the future (you will make a positive profit). A bear market is an expectation that the stock prices will fall (you will lose money). It is vital to note that no person or entity has ever perfectly guessed the future trends of the stock market. This is an educated guess.
- Good Till Canceled Order: Also known as “GTC”, this term means that your purchase will continue until you cancel it and “it will be executed whenever the stock comes to your price.”
- Day Order: This term is a purchase that only lasts for the same day that it is placed
- Volatility: How quickly a stock rises and falls. If the price of a stock drastically increases or decreases, the higher its volatility. If the price doesn’t change that much, then it has low volatility.
- Liquidity: How easily you can buy and sell a stock. The more liquid (easier to buy/sell) a stock is the lower risk, and the lower return. The less liquid (harder to buy/sell) a stock is the higher the risk, and the higher return.
- Trading Volume: The number of shares that are traded in a single day
- Capitalization: What the market believes the value of the company is
- Authorized Shares: The total number of shares a company allows to be traded
- IPO: Once a private company becomes publicly traded, an initial price offering is the first price a company sets for its stock. Becoming publicly-traded helps a company raise money.
- Blue Chip Stocks: “These are the large, industry-leading companies offering stable dividend payments.”
- Broker: A person who buys and sells stocks for you (they will take a percentage of your returns). Many people use brokers because they have a higher understanding of the stock market. The broker’s best interest is for your money to succeed in the stock market because the percentage they earn from your returns is how they make money.
- Hedge Funds/Mutual Funds: Similar to a Broker, these are groups of people, usually associated with banks, to whom a person can give large amounts of money, so they can invest in numerous stocks and/or other assets.
- ETFs: (exchange-traded funds) similar to stocks, a person can buy and sell ETFs. ETFs track difference indexes. For example, ETFs track well-known indexes like the S&P 500 and the Dow Jones Industrial Average (indexes measure the hundreds of companies’ current and past stock prices which calculate the performance of the market).
- Dividend: The number of the company’s earnings that are paid directly to their shareholders (people who own the stock).
- Short Selling: This basically means that a person is betting against the stock. A person is betting that the stock price will fall, not rise. For example, to short sell a stock on ABC Company, a person takes a loan of 5 shares from a broker. Let’s say that the price was original $10 per share. If the price goes down to $5 per share, then the 5 shares would now be worth $25, rather than $50. The person would then give the 5 shares back to the broker, earning $25.
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