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With all that is going on in the world, you are sure to wonder how to have financial security in the years ahead. Knowing the basics about saving and investing will get you on the path to financial security. Understanding risk, strategies and basic concepts about investing are crucial. You may want this knowledge to make decisions about your own finances, or you may be considering a career in investing. Spending 15 minutes reading through this introduction to investing will give you the foundation you need. With another 1-2 hours, you can delve into the additional resources (and even longer if you read the recommended books or listen to the podcasts).

Table of Contents

Section 1: What is Investing?
Section 2: Understanding Asset Classes
Section 3: Common Stock Market Terms
Section 4: Alternative Investments
Section 5: Investing Strategies
Section 6: Investment Risk Management
Section 7: Investing During an Economic Downturn
Section 8: Investing Resources
Section 9: Typical Investment Courses
Section 10: Investment Degrees

Section 1: What is Investing?

Buy Low, Sell High.

We have all heard about investing in books, television, and movies. We know some of the language, but what exactly is investing and why is it important?

Investing is the act of allocating resources (think buying stocks or purchasing an investment property) with the expectation of generating income or profits in the future.

Investing is different from saving or trading. Unlike saving, the goal of investing typically involves not only wealth preservation but also wealth creation. Unlike trading, investing typically is focused on long-term goals and spans many years or even decades.

What types of investments are available? Are there different investing strategies? Is investing risky? What about during a recession, do people still invest?

This introduction to investing will answer all the questions above and more.

Additional Resources for What is Investing

Section 2: Understanding Asset Classes

Now that we have a general understanding of investing, it is crucial to understand the different types of investments available and how they relate to each other. The primary groupings of investment types are known as asset classes. Let’s take a deeper look.

What are the main types of asset classes?

Asset classes, as introduced above, are a grouping of similar kinds of investments. Think of categories such as “fruits” or “vegetables”.

Within these categories are many different products that all share one or more similar traits. An asset class contains many different investments or instruments that share similar traits and are subject to the same group of regulations and laws. So, what are the major types of investment asset classes?

● Equities (aka Stocks): Owning shares in a company. When you buy stocks, you are buying equities. Equities represent a claim on a portion of a company’s assets and profits, and generally don’t offer any fixed payments.

● Fixed Income (aka Bonds or Debt): Lending money to a company or institution (i.e. the government). Fixed-income assets pay investors interest or dividends until the maturity date when the initial investment (principal) is repaid).

● Cash and Cash Equivalents: Money in a savings/checking account, or funds that can be converted to cash on demand (i.e. commercial paper, short-term government bonds, Treasury bills). This is the most liquid type of investment and generally offers the lowest returns.

● Alternative Investments: Any other financial asset that does not fall into the three traditional asset classes above. Real estate, natural resources, artwork, and cryptocurrency are all examples of alternative investments.

What do you think?

Which type of investment asset most interests you?

Additional Resources for Understanding Asset Classes

Section 3: Common Stock Market Terms

The stock market is a general term for a place where investors can buy, sell, and trade equities.

There are many industry-specific terms that investors should be familiar with before jumping into the ring.

Learning some of the basic stock market terms will help accelerate the process. Here is a list of the top 15 most common stock market terms:

1. Bear Market: A period of general stock market price decline in which prices drop by 20% (or more) from recent highs. The opposite of a bull market.

2. Blue-Chip Stocks: Shares of large, established, and stable companies. Blue-chip companies typically have a market valuation of over US$10 billion, a solid history of sustained growth, and are seen by investors as highly reliable.

3. Bull Market: A period of general stock market price appreciation. The opposite of a bear market.

4. Broker: A person or firm that acts as an intermediary between buyer and seller in exchange for a fee or commission.

5. Day Trading: The practice of buying and selling a financial instrument (i.e. stock) within the same trading day.

6. Dividend: The distribution of a company’s earnings paid to shareholders (can be in the form of additional stock or cash).

7. Exchange-Traded Fund (ETF): A grouping of securities that you can buy and sell through a broker. ETFs can be baskets of stocks, bonds, commodities, or some combination of all.

8. Index-Fund: A type of ETF or mutual fund that matches or tracks a specific market index (i.e. S&P 500).

9. Limit Order: An order to buy a stock below a set price or sell a stock above a set price.

10. Market Order: An order to buy or sell a stock at the set market price. Market prices can be volatile, and most traders utilize limit orders for expectation and risk management.

11. Mutual Fund: A type of investment vehicle composed of a portfolio of different stocks, bonds, or other securities. Mutual funds tend to be actively managed, whereas ETFs tend to be passively managed.

12. Portfolio: The grouping of investments owned by an investor. Collectively, the investments are known as the portfolio.

13. Short Selling: Borrowing shares from someone else with the promise to return them at a later date. An investor can sell the shares now (without owning them) at the current price and must buy the shares back in the future at the future price. Short-selling is a strategy to profit from the decline of a share price.

14. Volatility: How much an asset’s price changes around the average price over some time. As a general rule of thumb, higher volatility implies higher risk (of price movement), and lower volatility implies lower risk (of price movement).

15. Yield: A measure or rate of return for a given investment over time (expressed as a percentage).

What do you think?

When do you think is a good time to invest in the stock market?

Additional Resources for Common Stock Market Terms

Section 4: Alternative Investments

Alternative investments are broadly described as those investments which don’t fit into the traditional categories of equities (stocks), fixed-income (bonds or debt), or cash and cash equivalents. Alternative investments can also describe investments that utilize non-traditional trading strategies.

What are some examples of alternative investments?

The most common alternative investments are real estate, commodities, private equity, and hedge funds.

Real Estate

Investing in real estate is a very popular and flexible strategy to help diversify a portfolio.

Many people believe real estate investing is only for the ultra-rich. The truth is, investors at all levels can add real estate assets to their portfolios through things like real estate exchange-traded funds and real estate investment trusts (REITs).

Commodities

There are many ways investors can invest in commodities. Some investors chose to purchase physical raw commodities such as gold or silver bullion. Other investors utilize futures trading or other financial instruments that directly track a commodity index. Another option is to invest in specialized commodities exchange-traded funds and mutual funds (i.e. an oil and gas fund that purchases shares of different companies involved in the oil and gas sector – energy exploration, refining, or distribution).

Private Equity

Private equity investing is a type of alternative investment that is involved with the purchase of or investment in private companies. This is another option for investors looking to diversify their portfolios and can provide advantages when compared to investing in solely public companies.

Hedge Funds

Hedge funds are financial partnerships that utilize pooled funds to employ active trading strategies in hopes of higher than market average returns. Hedge funds can offer investors a wide range of trading strategies and access to non-traditional markets. Highly skilled managers can employ custom trading strategies and seek out market inefficiencies which can add significant value over time. These sophisticated and high-risk funds are an exclusive asset class only available to “accredited” or qualified investors as determined by the Securities and Exchange Commission (SEC).

What do you think?

Which alternative investments do you see as high-risk? Which do you see as low-risk?

Additional Resources for Alternative Investments

Section 5: Investing Strategies

An investment strategy is an overall approach that guides the choices an investor makes about his or her portfolio. Choosing an investing strategy is a key component to help ensure the investment choices you make align with your financial goals. Different strategies will assume different tactics based on your outlook and fundamental beliefs. In this section, we will take a closer look at three of the most common types of investment strategies.

1. Value Investing

Perhaps the most well-known value investor is none other than Warren Buffet. Value investors can be thought of as bargain shoppers – they seek out companies and stocks that they believe to be undervalued. This is a subjective type of investing predicated on the belief that markets are not fully rational and the investor can profit on this irrationality.

2. Growth Investing

Growth investors focus on investments with strong upside potential. Unlike value investing, growth investing is not concerned with the current value or book value. The focus for growth investors is on the future. What potential does the company have? Can the company be the next “big thing”? Growth investors look both at the company and the overall industry when evaluating upside potential.

3. Momentum Investing

Momentum investing is based on the theory that winners will keep winning and losers will keep losing (at least in the short term). Momentum investors are looking to “ride the wave” and capitalize on current trends.

This type of investing style believes in buying stocks that are on the way up, and potentially short-selling stocks that are on the way down. Momentum investing is based heavily on technical analysis and is a data-driven trading approach.

What do you think?

Which investment strategy is one you would focus on?

Additional Resources for Investing Risk Management

Section 6: Investment Risk Management

Managing risk is a critical component of investing. This fundamental concept applies to all investing strategies. Successful investors understand the principles of risk management and how to minimize the risk for a given strategy. There are many ways to minimize risk but the most common and general methods are diversification, dollar-cost averaging, and investing in the long term.

Diversification

Diversification is the act of, or the result of, achieving variety. Portfolio diversification is the practice of spreading investments across a variety of asset classes, industries, and even geographies.

Through diversification, investors lower volatility because not all assets move together. If one investment fails, other investments may stay steady or even increase. This helps to protect the value of an overall portfolio by making sure the portfolio is not overly dependent on the results of a single investment.

Dollar-Cost Averaging

Dollar-cost averaging is another risk management strategy and involves spreading out the total funds an investor wants to deploy over a set period. This helps minimize risk by reducing the impact of price volatility.

Let’s say an investor has $100,000 and wants to purchase shares of Amazon stock. The investor can choose to simply purchase $100,000 in stock today and be done.

Maybe the investor thinks the price is a bit too high and should wait until tomorrow? Or next week?

Alternatively, the investor can decide to spread out the purchases into smaller chunks over time. Instead of purchasing all of the shares today, the investor can decide to make five smaller purchases of $20,000 each week for the next five weeks. The purchases will take place regardless of price and on this set schedule. This would be an example of dollar-cost averaging.

Dollar-cost averaging can help reduce the element of market timing or waiting until the best prices.

Investing for the Long Term

Investing with a long-term time horizon is one of the simplest ways for investors to reduce risk.

Research shows that while prices may be volatile over the short-term, prices will generally increase over the long-term (think five, 10, 20 years or even longer). Being able to withstand the short-term fluctuations in value requires a long-term vision and outlook.

What do you think?

What character traits do you have that would be a strength in managing risk?

Additional Resources for Investing Risk Management

Section 7: Investing During an Economic Downturn

For over 10 years following the 2008 economic recession, making money investing in stocks was relatively easy. Robust economic growth and record low-interest rates provided an ideal combination for stock prices to rise and companies to excel. Making money while in a period of economic downturn, or even a recession, takes a different approach and mindset. Let’s take a look at five tips for investing during a recession.

Five Tips for Investing During a Recession

Tip #1: Don’t Let Fear Dictate Decision Making

It can be tempting during an economic downturn to sell your stocks at a loss because you fear they will continue to decline. During a recession, stocks will underperform in the short-term. This is a normal part of the economic cycle. There have been as many as 47 recessions in the United States.

Each downturn in history has ended in an upturn over time. If your financial plan and time horizon allow, weathering the storm, or even adding to your positions may be the smarter choice.

Tip #2: Consider Adding Dividend Stocks

Dividend stocks have historically provided a financial cushion to investors during a time of recessions because of steady payouts. It is important to note that not all dividend stocks do well during a downturn. However, steady blue-chip dividend paying stocks can be a good defensive position that you should consider adding to your overall portfolio.

Tip #3: Buy Utilities

Utilities are a classic example of what many consider a “recession-proof” asset. The logic follows that people still need to pay for their electricity and water during times of economic downturn. While utilities may not have high-growth potential, the sector will likely be less volatile compared to other areas of the market.

Tip #4: Maintain your 401k Contributions

If you still have significant time before retiring, reducing contributions or cashing out retirement savings can be a costly mistake. Keeping contributions steady during an economic downturn is necessary for continuing to grow your portfolio and meeting your retirement goals.

Tip #5: Evaluate your Time Horizon

A simple rule of thumb to consider during an economic downturn is this: the shorter your retirement time horizon, the higher your need to move from more volatile to less volatile assets or strategies. If you have a longer time horizon, your ability to weather the storm and remain in more volatile assets (stocks) is higher. Furthermore, for those with a longer investing time horizon, adding or continuing to add to positions might be the most financially savvy option.

Consider your time horizon and make the investment choices that give you the highest chance of achieving your personal financial goals.

What do you think?

How can you prepare for an economic downturn?

Additional Resources for Investing During an Economic Downturn

Section 8: Investing Resources

Are you an experienced investor? Just starting? Investors at all levels can benefit from leveraging resources and continuing to learn about the industry. Today, it is easier than ever to access information and resources about investing. The trick is filtering out the good from the bad. Here is a list of six great investing resources you should be checking out if you are not already.

Books

● “The Little Book of Common Sense Investing” by John C Bogle

● “A Random Walk Down Wall Street” by Burton Malkiel

● “The Intelligent Investor” by Benjamin Graham

● “Beating the Street” by Peter Lynch

● “The Essays of Warren Buffett” by Warren Buffett

● “Thinking Fast and Slow” by Daniel Kahneman

Podcasts

● Planet Money from NPR. “The economy explained. Imagine you could call up a friend and say, ‘Meet me at the bar and tell me what’s going on with the economy.’ Now imagine that’s actually a fun evening.”

● Motley Fool Money from The Motley Fool. “Join host Chris Hill and a panel of Motley Fool investment analysts each week as they cover the week’s top business news and financial headlines while breaking down the stock market implications for investors. Plus, interviews with best-selling authors, industry experts, and an inside look at stocks on our radar.”

● Masters in Business from Bloomberg. “Bloomberg Opinion columnist Barry Ritholtz looks at the people and ideas that shape markets, investing and business.”

YouTube Channels

● Aswath Damodaran. Aswath Damodaran is the Kerschner Family Chair Professor of Finance at the Stern School of Business at NYU. He teaches valuation and corporate finance MBA courses.

● tastytrade. Tastytrade is a financial think tank and network that produces original programming about financial information, investment strategies, and entertainment related to the stock market and options trading.

● Ryan Scribner. Ryan produces entertaining YouTube content geared towards investors looking to learn the basics of investing and personal finance skills.

● Zacks Investment Research. Zacks provides news, commentary, and stock analysis to assist investors navigating through the market.

What do you think?

Which investment resources do you plan to look into?

Additional Resources for Introduction to investing

Section 9: Typical Investment Courses

Students interested in learning more about the investing field can take investing-oriented classes in multiple areas of study. Banking, finance, and real estate are the most common fields of study for investment courses. Here are some of the most common types of investment courses and what students can expect.

Introduction to Investing. Basic introductory investment courses are offered as part of degree programs and in support of personal development. Students learn about the basic investment types (i.e. asset classes) and analyze each type in terms of advantages, disadvantages, and historical performance. Students will also likely be introduced to the basics of portfolio management and performance evaluation.

Investment Management. Investment management courses take a deep dive into how individuals and companies manage investments. Students are introduced to investment risk and basic strategies for risk management. These courses will benefit students interested in many careers within the investment community such as wealth management, investment baking, institutional sales and trading, and even general financial careers.

Risk Management. Students can expect to gain an understanding of portfolio construction and how to measure and manage risk in an investment portfolio in this course.

First, students will study topics about asset correlation and diversification. Then, students will learn how to optimally shape different investment portfolios. Finally, students will take an in-depth look at risk: different types of risk, different factors that contribute to risk, and tools and techniques available to measure, manage, and hedge risk.

Alternative Investments. An alternative investment course will cover topics such as private equity, hedge funds, private debt, and real estate investing.

Students will learn to “speak the language” of alternative investments to better communicate ideas in the field, and develop the confidence to evaluate and assess alternative investment opportunities.

Real-Estate Investing. Real-estate investing classes focus exclusively on the real estate asset class.

Students will become familiarized with different real estate investment types and factors that influence purchase decisions and price. In most cases, students will analyze potential transactions and learn about different valuations techniques.

Additional Resources for Typical Investing Courses

Section 10: Investment Degrees

Investment degrees help students understand key concepts in banking and finance by combining economic and financial theories with math. Undergraduate degrees in investing will provide a solid foundation of knowledge and an opportunity to get a seat at the trading desk for your first investing job. It’s important to make sure you study the right subjects and choose the right degree.

No specific degree will guarantee success as an investment professional. Rather, choosing the degree and course programming that best aligns with your interests and strengths will ensure you excel in your area of expertise. So, let’s take a look at a few of the top undergraduate degrees for an aspiring investment professional.

Finance

A degree in finance is the most logical choice if you are looking to become an investment professional.

You will gain exposure to and an understanding of key investing concepts, financial statement analysis, different types of asset classes and securities, and corporate finance fundamentals.

Economics

An economics degree is also a smart choice for those looking to enter the investment or financial sector.

This degree exposes you to business cycles, monetary and fiscal policy, interest rates, currencies, and different economic indicators. An economics degree will provide you with a foundation of economic intuition that you can bring to a career in investing. You will also learn about statistical analysis and decision making concepts, both of which are helpful as an investment professional.

Computer Science

Investing is becoming increasingly technology-driven. This is increasing demand for investment professionals with a computer science or technology background. Large firms seek out individuals well-versed in computer science and statistics to help with risk management and trading algorithms. If you enjoy the quantitative concepts in investing, a computer science degree might be your perfect choice.

Math, Statistics, Engineering, or Physics

Investing involves a lot of risk and risk management. Investors rely on mathematical models to make predictions and run simulations. Degrees in mathematics and statistics can prepare students to be well-versed in this area and apply these concepts to a career in investing. Similarly, engineering and physics degrees cover quantitative concepts that can be applied to finance and investing.

Additional Resources for Types of Investment Degrees and Descriptions

Andrew Ziebarth

Master of Business Administration (M.B.A.), Finance | University of Pennsylvania – The Wharton School

United States Military Academy at West Point

June 2020

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