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Estimated reading time: 4 minutes and 5 seconds
Today we’re continuing on with our stocks topic. We’ll chat a little about stock indexes and introduce how to access them too. As per usual, we’ve got a few questions at the bottom for you to test your knowledge too.
🕵️♀️Fact of the day: The Easter Island monolith mystery
🗂️Stock Indexes: What are the advantages and disadvantages of indexes?
🤝Brokerage: Where can I buy stocks, what is a stock broker and how do I use them?
Key takeaways:
💡An index tracks the performance of a group of assets for example the largest 200 stocks by market capitalisation in Australia
💡You can buy and sell shares in the market on different platforms or through stock brokers
FACTS
🤯 Fact of the day
The Easter Island heads actually have bodies! UCLA scientists discovered the statues to have torsos and a waist which makes everything even more mysterious... source
🎬Recap
Here is a recap of where we left off on stocks.
💡Stocks represent ownership in a company and can be traded in a market
💡Market capitalisation is the price of a stock multiplied by the number of existing stocks
💡Common stocks provide voting rights while preferred stocks get paid out first if a company goes bust
Here’s a link to last week’s post if you want to read more!
WHAT IS A STOCK INDEX?
So a big problem people run into is what stocks to pick. There’s just so many and how can I trust Chad’s Wall Street cousin with his hot stock tip? As financial instruments have developed there have been different ways to assess the stock market beyond the individual shares that make it up. At the absolute base meaning, indexes measure the performance of a group of things in a standardised manner.
Enter stage right…Stock Indexes
In funance, an index generally means the performance tracking of a sector or market. Some of the most popular ones that you may hear are the S&P 500 (US), FTSE 100 (UK) or ASX 200 (AU). These weird letters and numbers track the top 500, 100 and 200 largest firms in their respective markets by market cap.
Ya cool, why does that matter to me though right? A stock index offers a diverse way to invest in the stock market without having to risk it all on one company. We can’t buy directly into an index but there are funds out there that will emulate it by creating a portfolio with similar traits and performance. This is what we call indexing. We can trade these funds through ETFs (but we’ll go through that next week) and buying the index is good for investors who are happy with matching the performance of the market rather than trying to outpace it.
BROKERAGE
So let’s say we’ve decided that stocks or indexes are the right product for us to invest in. How do we go about doing this? Chads cousin tells us what to buy but never how to buy. You can give a man a fish…🐟
A common method is through a stock broker. These are financial professionals who will allow us to execute the buying and selling of shares in the market, also known as orders (like at Maccas but with longer term gratification). Stock brokers generally work for a brokerage firm and will execute these orders for and between a large swathe of individual and institutional (aka companies) investors.
Consult the professionals in handling your chilli stocks
Back in the day only rich af individuals could get into the share market because brokerages were ‘full-service’ which meant they did research, shared individual advice and helped financial plan among other things. These days we have ‘discount brokers’ or common share trading platforms who keep mainly to the brokerage. Most of these guys have an online presence making the share market wayyyy more accessible for everyone.
There are a magnitude of brokers out there so let’s compare a few first.
Most of the large banks have their own trading platforms including CBA, Westpac and ANZ. Often an advantage of these is the ability to link to your existing accounts with these providers for ease of service.
There are also low complexity apps such as Superhero, eToro and Tiger Brokers which offer low brokerage but generally a smaller breadth of products.
Then you get to hyper complex products that encourage high volume and frequent trading. These brands include CMC, IG and Saxo.
🕵️♀️So many options…that means a bit of detective work when deciding on your platform!
What fees are involved?
How often will I be investing and how much?
What products can I trade and what reporting do I receive?
Do I get support, education and how secure is my broker?
It’s important to do your research and make sure you are comfortable with the offering. A good place to start is with comparison sites such as: https://www.finder.com.au/best-online-share-trading-platforms
Next week, Exchange Traded Funds aka ETFs…
Q&A
As always, we’ve got some questions/answers below for you to test your knowledge.
🙋♀️ Fill in the blanks and true or false
❓You can trade stocks through an intermediary known as ____.
a broker
an investor
a lender
❓A broker allows you to trade stocks with other parties on their platform.
true
false
❓A stock index is a group of stocks that are used as a proxy for a stock market or ____.
bean
sector
exchange
👇 Answers
a broker, true, sector
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DISCLAIMER:
None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.