Index
- How to start investing in stocks: A beginner's guide
- Online brokers
- Minimums, commissions, fees
- Diversification
- Investing with a small budget
- Savings
- Investments depending on money, $500-5k
- Index funds, ETFs
- Benjamin Graham's timeless investment principles
- Invest with a margin of safety
- Expect volatilty and profit from it
- Know what type of investor you are
- 4 investment strategies
- Value investing
- Growth investing
- Momentum investing
- Dollar cost averaging (DCA)
- Robo advisors
- Stock
- Bond
- Mutual funds
- Ramen profitability
- Stock market simulators
- Recession
- Elasticity vs. inelasticity of demand
- Credit card vs. debit card
- Investing books for every kind of investor
- For beginners
- For stock pickers / traders
- For indexers / asset allocators
- For history lovers
- Technical finance books
You've probably heard that investing is a type of gambling. If that's true, then why should you invest your money in securities (which requires a lot of time and studying) rather than using that money to gamble (which for many people is a lot more fun)? As you may have guessed, it's because there is a huge difference in the level of risk between investing and, say, poker. Poker is an example of a zero-sum game. That means that if someone wins, someone else has to lose. If you add up all the wins and losses of all the hands, the sum will be zero.
By contrast, securities investing is for the most part not a zero-sum game (though many will disagree on this matter). For example, let's say that you buy shares in a (fictitious) company called Floyd's Fiberglass USA Inc. If the company's stock price goes up, then you make money and so do all the other investors as does the Floyd's Fiberglass itself. Conversely, if Floyd's Fiberglass' stock price goes down, you suffer, the other investors suffer and Floyd's Fiberglass is going to be unhappy too. In this example, there's no one who's making money from Floyd's Fiberglass' misfortune.
On the other hand, there are many types of securities investments that approach a zero-sum game, which is to say they are very risky. Futures and Options are examples of high-risk investments, but those products are not for the beginning investor and thus will not be discussed at length in this tutorial.
Random walk theory proclaims that stocks take a random and unpredictable path that makes all methods of predicting stock prices futile in the long run.
Random walk theory believes it's impossible to outperform the market without assuming additional risk.
Random walk theory considers technical analysis undependable because it results in chartists only buying or selling a security after a move has occurred.
Random walk theory claims that investment advisors add little or no value to an investor’s portfolio.
The book "A random walk down Wall Street" in 1973 popularized the efficient market hypothesis (EMH). He concluded that due to the short-term randomness of returns, investors would be better off investing in a passively managed, well-diversified fund.
Academics have not conclusively proved whether the stock market truly operates like a random walk or is based on predictable trends. There have been many published studies that support or undermine both sides of the issue.