Since we are talking about stock market investing a good place to start might be with an explanation of what a stock market actually is. Basically a stock market is like a physical place like the New York Stock Exchange or it could be a virtual place like the NASDAQ market where stocks are bought and sold. And by the way, the New York Stock Exchange and NASDAQ are both located in the United States. And they rank number one and two in the world in terms of the value of the companies that are traded on these exchanges. In addition, around the world, some of the most important stock exchanges include England's London Stock Exchange, Japan's Tokyo Stock Exchange China's Shanghai and Hong Kong Stock Exchanges, India's Bombay Stock Exchange and Brazil's BMF Bovespa. As to actually what can be traded on these exchanges, the first obvious answer is "Stock" in companies, but what are stocks actually? They're more than just a piece of paper, some bytes and bits that seem to magically fluctuate in value. Stocks are actually tiny shares of ownership in a company. So for example, if you want to buy shares of an American company like Apple, its stock symbol is AAPL and it is listed on the NASDAQ exchange. After buying some shares, you would be a part owner of Apple itself, along with the many others who hold stock. Depending on the type of stock, how many shares you own and whether it is traded publicly to anyone who wants to buy some in an exchange, you can be entitled to dividends, the opportunity to attend shareholder's meetings, and sometimes participate in votes about company decisions. As to how you actually make money, The key concept here is that of total return. The idea of total return on a stock is that your gains consist of two components. The first component is the annual dividend a stock may pay out to you as a shareholder. To that you must add any price appreciation on the stock over the course of a year. Suppose then that you buy one share of stock for $100 on January 1st, in the fictional United Conglomerate Industries, stock symbol UCI. Over the course of the year, the price increases to $105, while UCI pays you nice little dividend of $5. So, what's your total return for the year? Well you certainly don't need any calculus to answer that one. Your total return for the year is simply 10%. Five bucks of price appreciation plus five bucks of dividend divided by your original purchase price. Now here's our next important point. It's not just companies that are traded in the stock market these days. In 1993 a new type of trading instrument called the Exchange Traded Fund was born. The short-hand name for these instruments is ETFs. And today, using ETFs you can trade entire market sectors, like energy, technology, or health care using ETFs like XLE, XLK and XLV. The advantage of trading a sector rather than just a company within that sector is that you eliminate what's called company risk. The idea here is that a sector like housing or pharmaceuticals might be doing very well, but one particular company within that sector may fall on some bad luck. If you invest in that particularly star-crossed company to take advantage of a favorable sector trend, you'll be out of luck. But if you use an ETF to invest in the sector itself, you'll do much better. The same idea behind sector ETF investing is also behind that class of ETFs that allow you to buy the broad market of a country rather than any of the individual sectors or companies within that market. For example, suppose you don't want to bother trying to pick a company or a sector, but simply want to speculate on a broad market like the S&P 500 in the United States. This market index contains the 500 largest companies in the US with a collected value of over $5 trillion. If you wanna buy a piece of this rock, all you need to do is invest in the exchange traded fund SPY. The beauty of investing in a stock market index fund like SPY is that it eliminates both company and sector risk. As to how you actually go about buying and selling stocks, that requires you to set up a stock trading account. Just like stock market investing itself you also want to do your homework here as there are many different vendors to choose from. Here's just one top ten review list to look over. It includes such familiar names as E*Trade, Fidelity, and Charles Schwab. Some key parameters you wanna look at in making your decisions include how much commission do you want to pay per trade. And more importantly for beginners, how easy is the trading platform to use. Note here that as a general rule, you tend to get less service, the lower commission rate per trade. So choose wisely. Now, before you take the stock market plunge, I'm going to suggest that you spend a good year or more learning to trade and invest using a simulated stock market game, like Stock Check or Wall Street Survivor. There's a very simple reason for starting with simulated trading. Most people who jump right into stock trading with real money, lose most or all of that money. As the cynics on Wall Street say, that's paying your tuition to the market. So hold your horses and practice first with play money and that's what I will show you how to do in the last module of this lesson. [MUSIC]
