Starting your stock investment journey can be an exciting yet daunting endeavor, especially for beginners. Investing involves setting clear goals, understanding your risk tolerance, opening a brokerage account, deciding on an investment strategy, diversifying your portfolio, and regularly reviewing your investments. With various financial instruments to trade and numerous exchanges to buy and sell securities, being an educated and smart investor is crucial.
Setting a goal, setting the outcome
IBKR Podcasts’ Cents of Security, Episode 5, “Investing-101”, emphasizes the importance of setting a goal, or as Chris Guazzo, former president of Rye High School’s Investing Club, best says,
“setting the outcome that you want to achieve … [to] stay focused along the way.”
When you set goals, or set the outcome, it provides you with a sense of direction. The objective helps you stay the course and achieve what you initially aspired to do.
Investing, defined
So, in setting a goal, setting the outcome, what exactly is investing? And where do you start?
Investing is finding, oftentimes, a company, or real estate property, and expending money with the expectation of achieving a profit. It includes the buying and selling of assets within a portfolio to achieve a greater objective.
Considering, before making any type of investment, it is essential to not only understand your risk tolerance, but to also understand the market atmosphere, which, as previously mentioned, includes being knowledgeable about various financial instruments to trade and numerous exchanges to buy and sell securities.
Financial instruments
To begin, let’s start with the basics – i.e., financial instruments.
Financial instruments are monetary contracts; real or virtual documents representing a legal agreement between parties. They are assets that can be traded or exchanged, and some examples include stocks or shares, exchange-traded funds (ETFs), certificates of deposit (CDs), mutual funds, loans, and derivatives contracts.
These monetary contracts are divided into two types (cash and derivatives), and they are also categorized by asset class (debt-based or equity-based).
Foreign exchange instruments are the third, unique type of financial instrument.
Instrument by type
Cash
Directly influenced by the market and can be readily bought and sold (e.g., stocks and bonds).
Derivatives
Based on underlying components, such as assets, interest rates, or indices (e.g., a call option on a particular stock, and over-the-counter (OTC) and exchange-traded derivatives).
Instrument by asset class
Debt-based
Loans made by an investor to the issuer in return for a payment of interest (e.g., Treasury bills (T-bills), commercial paper, bonds, or mortgage-backed securities (MBS)).
Equity-based
Represent ownership of an asset (e.g., ETFs, mutual funds, stock options, and equity futures).
Foreign exchange (forex or f/x)
Include derivatives such as forwards, futures, options on currency pairs, and currency swaps.
What are stock exchanges?
Now that we’ve covered the basics, where are these financial instruments traded or exchanged?
An exchange is a marketplace where securities, options, futures, or commodities are traded. The primary functions of an exchange are to ensure fair and orderly trading, and to distribute price information for any securities trading on the exchange.1
Types of stock exchanges
An exchange can be a physical location or an electronic platform.
Types of stock exchanges include auction exchanges, or the auction market, U.S. exchanges, like the New York Stock Exchange (NYSE), the Nasdaq, and over-the-counter (OTC), and global exchanges, such as Chicago Mercantile Exchange (CME), the Shanghai Stock Exchange (SSE), Euronext, the London Stock Exchange (LSE), and the Tokyo Stock Exchange, to name a few.
Closing Thoughts
As a beginner to stock investing, it’s essential to continually increase your knowledge base. Staying on top of global news, market trends, and new information, such as if the Fed increases interest rates, is beneficial to your overall potential of being a successful investor.
Subscribe to Interactive Brokers’ daily Traders’ Insight newsletter. There’s always something new to read, find and learn, and the Campus offers interactive courses and monthly webinars where you can apply your knowledge and put your skills to the test.
And remember, not every day can be a win in the stock market, but with the right resources and knowledge base, you can better prepare yourself for navigating the market’s highs and lows.
Learn from your journey. It’s not about the outcome or destination, but your willingness to learn from the market and your trading decisions, and your ability to continue to push forward through it all.
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Footnotes
1 Interactive Brokers. 2024. Exchange. https://www.interactivebrokers.com/campus/glossary-terms/exchange/
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
Disclosure: Options (with multiple legs)
Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options by clicking the link below. Multiple leg strategies, including spreads, will incur multiple transaction costs. “Characteristics and Risks of Standardized Options”
Disclosure: Forex
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.
Disclosure: ETFs
Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Mutual Funds
Mutual Funds are investments that pool the funds of investors to purchase a range of securities to meet specified objectives, such as growth, income or both. Investors are reminded to consider the various objectives, fees, and other risks associated with investing in Mutual Funds. Please read the prospectus accordingly. This communication is not to be construed as a recommendation, solicitation or promotion of any specific fund, or family of funds. Interactive Brokers may receive compensation from fund companies in connection with purchases and holdings of mutual fund shares. Such compensation is paid out of the funds’ assets. However, IBKR does not solicit you to invest in specific funds and does not recommend specific funds or any other products to you. For additional information please visit https://www.interactivebrokers.com/en/index.php?f=1563&p=mf
