Most stuff we buy can be found in well-known marketplaces. Where do you go to buy avocados? The supermarket. Where do you go to buy electronics? Amazon.ae or the local electronics store.
Investing in stocks is no different; it is essentially a transaction involving a buyer and a seller in a market. This market is called a stock exchange.
There are multiple stock exchanges around the world, each catering to different markets and different geographies. When companies go public, they choose to list their stock on a specific stock exchange which is usually located in the company’s country of incorporation.
Examples of stock exchanges
You may have heard of a few famous stock exchanges in the news:
- New York Stock Exchange (NYSE)
- The NASDAQ Stock Exchange
- London Stock Exchange (LSE)
- Toronto Stock Exchange (TSX)
Each exchange lists different companies, allows investors to trade stocks in these companies, and opens during the business hours of the country it is located in. For example, the NYSE is open for trading from 9:30am to 4:00pm Monday to Friday.
As an investor, you don’t need to physically visit a stock exchange to buy stocks. The process has been digitized a long time ago and many layers of middle-men have been introduced, distilling the entire buying & selling process down to a click of a button.
Stock brokers: The middle-men
Envision the typical movie about the financial system. What is the opening scene? A busy stock exchange floor with people screaming at each other, fiercely waving weird financial sign language all over the trading floor. Several years ago, this chaos is where the largest trades happened every day.
Today the largest trades happen over computer networks. Trading stocks today is done via middle-men. These middle men are called stock brokers. They offer you access to stock exchanges and facilitate the trading of stocks on your behalf. Most stock brokers have online platforms allowing you to create an account and trade stocks.
We will cover stock brokers in more depth in a follow-up post. For now, what’s important to remember is stock brokers are effectively your key to accessing the stock market, trading stocks, and managing your investments.
The 3 main types of financial asset classes
The question now is: What type of stuff can you invest in if you are to dabble in the stock market?
Well, as it turns out, there are three main types of financial assets. These are by no means the only assets available out there, but they are the minimum set of assets required to invest effectively.
Stocks are the first and most important asset class in an effective investment strategy. As we’ve discussed in our post on companies, to own a share in a company you must own its underlying stock.
Stocks are typically the most volatile but most important of the three asset classes. The risk of owning stocks is higher than the other two asset classes. But so is the reward.
Bonds are the the second most important asset class. Our post about bonds outlined how you could become a lender to a government, and own a relatively stable yet interest-yielding investment.
Risks of bond ownership are lower than stock ownerships. But, as you may have guessed, so are the rewards.
Cash is the third asset class to be aware of in the context of a safe and effective investment strategy. Wait, isn’t idle cash the worst investment ever? Relax. Count to 10. Yes, investing all of your money in a simple checking account that earns you zero interest is a bad idea.
The reason why cash is a part of this strategy will become clearer over the next few posts. As you guessed it, the risk of holding cash is nearly zero, but so are the rewards.