The Basics for

Investing in
Stocks
Although they are unpredictable over the short term,
stocks have delivered superior returns over the long haul.

In partnership with

By the Editors of
Kiplinger’s Personal Finance
 contents

TABLE OF CONTENTS
1 DIfferent flavors of stocks

About the Investor Protection Trust 3 The importance of diversification

The Investor Protection Trust 3 How to pick stocks

(IPT) is a nonprofit organiza- 4 Key measures of value
tion devoted to investor edu- 7 Finding growth
cation. More than half of all Americans are 8 When to sell
now invested in the securities markets, making 11 Consider mutual funds
investor education and protection vitally im- 13 Glossary of investing terms
portant. Since 1993 the Investor Protection
Trust has worked with the States and at the
national level to provide the independent,
objective investor education needed by all
Americans to make informed investment
decisions. For additional information, visit
www.investorprotection.org.

About the Investor Protection Institute

The Investor Protection
Institute (IPI) is an indepen-
dent nonprofit organization
that advances investor protection by conduct-
ing and supporting unbiased research and
groundbreaking education programs. IPI
carries out its mission through investor educa-
tion, protection and research programs deliv-
ered at the national and grassroots level in
collaboration with state securities regulators
and other strategic partners. IPI is dedicated
to providing innovative investor protection
programs that will make a meaningful differ-
ence in the financial lives of Americans in all
walks of life and at all levels of sophistication
about financial matters. For additional infor- MONEY
SMART
LIVING
mation, visit www.iInvest.org. PERSONAL FINANCE

© 2015 by The Kiplinger Washington Editors Inc. All rights reserved.

2
Stocks deserve a place in long-term plans
Over the long run, stocks have beaten the performance should not be money that you might need in three to
of any other major asset class by a wide margin. Since five years. Stocks tend to deliver handsome returns
1926, stocks have returned nearly 10% per year, on over the long run, but volatile markets may not coop-
average. Note that this 89-year span includes numer- erate with your short-term cash needs.
ous wars, recessions and the Great Depression. It also Common stocks represent a share of ownership in
includes the severe decline in stock prices from late the company that issues the shares (for a description
2007 to early 2009, a period that overlaps what some of preferred stocks, see the box on page 5). Stock
call the Great Recession. prices move according to how a company performs,
Stocks have proved their worth and deserve a how investors perceive the company’s future and the
prominent place in any long-term investment plan, movement of the overall stock market. The following
such as a retirement account. But because stocks are is a guide to understanding stocks and how to invest
volatile—which means that by their nature, their value in them.
rises and falls—invest in them with caution. Ideally,
stocks should be held to meet medium- and long- Different Flavors of Stocks
term goals. In other words, money invested in stocks Growth stocks are shares of companies with the
potential to consistently generate above-average reve-
nues and profit growth. These companies tend to rein-
vest most or all of their earnings in their businesses
and pay out little or none of their profits to sharehold-
ers in the form of dividends. Growth companies ex-
pand faster than the overall economy, yet you can
sometimes find these companies in mature industries.
Note that even fast-growing companies are not neces-
sarily good investments if their shares are overvalued.
Cyclical stocks are shares of companies whose
sales and earnings are highly sensitive to the ups and
downs of the economy. When the economy is per-
forming well, cyclical companies tend to shine. A con-
tracting economy typically hammers the sales and

1
www.investorprotection.org
Stocks that pay large dividends are less volatile
profits of these companies and hurts their stocks. Cy- capitalization of $1 billion or less (market capitaliza-
clical industries include manufacturers of steel, auto- tion is a company’s stock price multiplied by the num-
mobiles and chemicals, airlines and homebuilders. ber of shares outstanding).
Defensive stocks describe shares of companies Foreign stocks add valuable diversification to a
whose sales of goods and services tend to hold up purely domestic stock portfolio. That’s because U.S.
well even during economic downturns. Examples of and foreign stock markets don't always move in
industries that are substantially insulated from the tandem. Foreign stocks provide exposure to overseas
business cycle are utilities, government contractors currencies, economies and business cycles. Overseas
and producers of basic consumer products, such as stocks are divided into two subsets: developed mar-
food, beverages and pharmaceuticals. kets (such as Western Europe, Japan and Canada)
Income stocks pay out a relatively high ratio of
their earnings in the form of dividends. The companies how to
that issue them tend to be mature and have limited place an order
opportunities for reinvesting their profits into more-
attractive opportunities. Example: many utilities. You place orders to buy or sell stocks through
Stocks that pay large dividends are usually less a broker. If you work with a full-service broker,
volatile because investors regularly receive cash you may just call your account executive and
dividends, regardless of market gyrations. tell him or her what you want to do. If you work
Value stocks describe stocks that are cheap in re- with an online broker, you can place the order
lation to fundamental measures such as profits, sales, yourself through the brokerage’s Web site. If
cash flow or the value of a company’s assets. you place a market order, you’re committing to
Small-company stocks have generated better buying or selling a stock at the best current
returns over time than stocks of large companies. price. With a limit order, you specify the price
Young, small companies tend to grow faster than their at which you are willing to buy or sell a stock.
larger brethren. But there’s a trade-off: Small-com- When and if the market price reaches the
pany stocks are much more volatile than shares of big limit-order price, the order is executed. Stock
companies. There are a number of ways of defining investors pay commissions to brokers on both
what constitutes a small company. By one common stock purchases and sales.
definition, a small company is one with a stock-market

2
the basics for investing in stocks
 small-company and emerging-markets stocks. The
appropriate blend of stocks depends on personal cir-
cumstances, including your time horizon (when you’ll
need to spend the money) and your tolerance for risk
and volatility (your ability to sleep at night when stock
prices fall).

How to Pick Stocks

Broadly speaking, there are two basic approaches to
stock picking: one based on an assessment of eco-
and faster-growing emerging markets (China, India nomic and market factors (known as a top-down
and Brazil, to name a few). approach) and one based exclusively on analysis of
individual stocks (a bottom-up approach). Investors—
The Importance of Diversification including professionals such as mutual fund manag-
Diversification means spreading your money among ers—sometimes combine both approaches in select-
many investments to lessen risk. The idea is to avoid a ing stocks.
situation in which your investments are concentrated
in so few holdings that big declines in the value of just Top-down approach. The investor begins with an
one or two of them wreck your portfolio. If you buy in- analysis of the economy, markets and industries.
dividual stocks, you probably need a minimum of 20 Trends in the economy, such as employment and in-
to 30 companies from a variety of industries to pro- terest rates, substantially influence company earnings.
vide sufficient diversification. (If you choose to invest Because many companies operate all over the world,
in a diversified stock mutual fund, the fund will achieve the analysis must often be global in scope.
this diversification for you; more on stock funds later.) Stocks tend to perform differently at various
For instance, you might strive for a mix of stocks points in an economic cycle. For instance, financial
that tend to fare well in different economic environ- companies and homebuilders often do well early in
ments, such as strong, stagnant and inflationary an economic recovery, or even in anticipation of a
economies. Perhaps you want to blend growth and recovery. Commodities-related companies, such
income stocks in the portfolio and add a dash of as chemical and aluminum manufacturers, often

3
www.investorprotection.org
There are numerous ways to pick stocks
perform well in the late stages of an economic A company that earns $400 million in a year and has
cycle, when inflation tends to heat up and they 100 million shares outstanding has earnings of $4 per
can command higher prices for their products. share. If its stock sells for $40, the P/E ratio is $40
divided by $4, or 10.
Bottom-up analysis. There are numerous ways to The P/E ratio tells you how much investors are will-
pick individual stocks, some of them quite complex. In ing to pay for each dollar a company earns. You can
general, though, investors prefer companies that de- use that number in a variety of ways to spot value. For
liver solid earnings growth or those whose share prices example, you might look for P/E ratios that are low on
are cheap relative to the perceived value of the com- an absolute basis—in the single digits, for example. Or
pany. Finding the best of both worlds—a rapidly grow- you might look for stocks with P/E ratios lower
ing company whose share price is cheap—is an even than the P/E ratio of the overall market. Or you might
better formula for successful stock picking. Of course,
that is much easier said than done.
It’s crucial to understand how stocks are valued. By
itself, a stock’s price tells you nothing about its value.
L all about
technical analysis
A stock that trades for a nickel a share can be expen- This is actually a third school of stock picking.
sive, while a stock that trades for $500 per share can Technical analysts make decisions based on
be cheap. As mentioned earlier, what matters is how observations of historical market and stock
much the share price compares with a fundamental trends and current data. They study patterns
measure, such as a company’s profits or sales. of price movements and trading volume of the
market and individual stocks, looking at such
Key Measures of Value things as moving averages and relative
Price-earnings ratio. The P/E ratio is perhaps the strength. Practitioners of technical analysis
best-known and most widely used yardstick to assess pay little or no attention to fundamentals—
the value of a stock. The numerator, P, is the current they may not even care what business a com-
market price of a stock. The denominator, E, is the pany is in. Many academics scoff at technical
company’s earnings per share, which is calculated by analysis, but the technique has many passion-
dividing after-tax profits by the average number of ate advocates.
outstanding shares of common stock. For example:

4
the basics for investing in stocks
 search for stocks of companies whose P/E ratios are

l all about
preferred stocks
lower than the average P/E of the industry in which
they operate. Warning: Because an entire stock market
or industry can be overvalued (think Internet stocks in
Preferred stocks have elements of both the late 1990s) purchasing a stock purely because it’s
stocks and bonds. As with common stock, relatively cheap can be dangerous.
companies issue preferred shares. Preferred To make matters trickier, stock investors generally
stock ranks higher than common stock in the base their decisions on expectations of a company’s
company’s capital structure, which means future earnings. So they are usually willing to pay up—
that preferred shareholders are paid dividends
first and have a better chance than common
Stock investors generally
shareholders of being paid off if the company
base their decisions on a
goes into bankruptcy. Bond investors, how-
company’s future earnings­
ever, have a higher claim on a company’s and are willing to pay if they
assets than holders of preferred stock. think the company will grow.
Preferred shares resemble bonds in that
dividend payments are typically high but fixed.
As such, preferred shareholders cannot bene- that is, accept a high P/E ratio—if they think a com-
fit in the growth of the company, but neither pany will grow rapidly in the future. Because of this
are they hurt if the company stumbles a bit. focus on the future, many investors calculate P/E
In fact, preferred-share prices tend to behave ratios on the basis of estimated future profits—
like bond prices, rising as interest rates fall typically what a company is expected to earn over
and sinking as interest rates rise. But unlike the coming 12 months. You can find earnings esti-
bonds, most preferred stocks do not have mates on many Internet portals, including Yahoo!
maturity dates, and the issuers of the shares Finance (http://finance.yahoo.com) and MSNMoney
(unlike borrowers paying interest to bond- (http://money.msn.com).
holders) are under no legal obligation to pay
dividends to investors. Price-to-book-value ratio. This method of valuing
a stock is useful in certain cases and not so useful

5
www.investorprotection.org
Dividend yield is akin to interest on savings
in many others. Book value, also known as share- ing methods. There are several ways of measuring
holder equity, is essentially a company’s assets minus cash flow. One simple definition is that cash flow
liabilities. Divide that number by the average number equals earnings from operations, plus depreciation
of shares outstanding to arrive at book value per and other noncash charges against earnings.
share, then divide the share price by book value per
share to arrive at a stock’s price-to-book-value ratio Dividend yield. Akin to interest on a savings account,
(P/B). Compare a stock’s P/B to that of similar this number is the amount of the dividend a company
companies to get a sense of relative value. pays to shareholders expressed as a percentage of
One instance in which price to book value is often the stock’s price. So, for example, if a company pays
used to evaluate a stock is when the P/E ratio doesn't out $2 a year (dividends are usually paid quarterly; in
make sense. This may be the case if a company has this case, the dividend would be 50 cents per quarter
no earnings (you can’t divide P by zero), negative earn- for every share you own) and the stock sells for $50
ings (that is, the company loses money), or its earn- a share, the yield is 4% ($2 divided by $50). Stocks
ings are temporarily distorted in either direction. This is with high dividend yields are sometimes seen as
often the case with cyclical companies, whose earn-
ings tend to be highly volatile.

Price-to-sales ratio. Price-to-sales ratio may be even

more useful than price-to-book-value ratio in valuing
a company whose earnings are negative or erratic.
That’s because sales are more stable than earnings
and because it’s more difficult for a company to use
accounting techniques to manipulate revenues than it
is to use them to manipulate earnings figures.

Price-to-cash-flow ratio. Use of this ratio to value

companies is growing in popularity. Cash flows are
more stable than earnings and, as with sales, are
much less prone to distortions from different account-

6
the basics for investing in stocks
better values than stocks that pay relatively small divi-
dends or none at all.
x beware
penny stocks
Financial strength. Although not technically a mea-
Take extra care with stocks that sell for ex-
sure of value, you should have a sense of how much
traordinarily low prices. Just because a price is
debt a company is carrying. Debt isn’t necessarily bad.
low doesn’t mean the stock is cheap according
Used judiciously, it can help a company boost profits.
to traditional ways of determining value.
“Penny stocks,” defined by the Securities and
Although not technically a Exchange Commission as stocks that sell for
measure of value, you should less than $5 per share, often deserve to be
have a sense of how much low-priced. The company might be in deep
debt a company is carrying. trouble. Plus, penny stocks are subject to
Debt isn’t necessarily bad. manipulation, particularly schemes to inflate
their share price temporarily. It’s crucial to do
your homework before investing in a penny
But too much debt can be dangerous, particularly
stock. Many penny-stock companies don’t file
when the economy weakens. If sales and profits
regular financial reports. If a company you’re
slump, a highly indebted company may have trouble
interested in doesn’t, stay away.
meeting its obligations to lenders. Two common mea-
sures of a company’s financial leverage are the ratio of
debt to equity and the ratio of debt to capital (equity to value a stock. Of course, the other side of the in-
representing what stockholders have put into the vesting question is discovering growing companies.
company and capital representing equity plus out- There are many ways to find great growth stocks.
standing debt). To get a sense of how leveraged a Perhaps the simplest is through your own observa-
company is, it’s best to compare these debt ratios to tions. You may dine at a restaurant chain with an
those of other companies in the same industry. interesting new concept that seems to be opening
a new facility every week. Your teenage kids may tip
Finding Growth you off to a new store that all their friends are patroniz-
Most of the discussion until now has focused on how ing. Or it could be a technology company that turns

7
www.investorprotection.org
Refusal to sell is the undoing of many investors
out one blockbuster product after another. As a rule,

e Dividend
reinvestment plans
you should invest only in companies that you can
understand.
You can find past growth rates and estimated
A dividend reinvestment plan is a low-cost future growth rates for earnings and sales in brokerage
way of reinvesting the dividends you receive reports and on the Internet. If you can find a company
from a company whose shares you own. that can generate earnings growth of 15% a year, its
When you purchase shares of a company profits will double in five years. If you haven’t overpaid
with a so-called DRIP, you can direct the for the stock, chances are good that your investment
company (when it holds your shares) to will double over that time frame, too.
reinvest your quarterly dividends for little
or no charge. DRIPs are particularly helpful When to Sell
to small investors because the plans allow The decision of when to unload a stock is as impor-
investors to buy fractional shares. DRIPs tant as deciding which stocks to buy in the first place.
also allow you to make additional invest- But the decision to sell is often harder than the deci-
ments in a company’s stock, either on a sion to buy. That’s because once you own a stock,
regular or occasional basis. Not all com- emotional factors come into play. If you own a stock
panies have DRIP plans; to find out whether that falls in value, you may want to hold on to it—
a company offers one, go to its Web site or whether you should or not—because by selling and
contact the company’s investor-relations locking in the loss you confirm that you made a bad
department. decision. If you own a stock that performs exceed-
In general, you have to own at least one ingly well, you may want to hold on because it has
share of a company’s stock before you can treated you so well, even if the stock has become
sign up for its DRIP. However, several hun- overvalued.
dred companies let you buy your first share The refusal to sell—whether due to unrealistic ex-
directly from the company at little or no pectations, stubbornness, lack of interest or mere
charge. Once you’ve signed up, you can buy inattention—is the undoing of many investors. As a
additional shares through the plan. long-term investor, you don’t want to cash in every
time your stock moves up a few dollars. Commissions

8
the basics for investing in stocks
 If a company’s basic, fundamental measures start to
weaken, it’s time to reconsider your investment. An ex-
ample might be a fast-expanding retail chain whose
sales per store suddenly decline after rising for years.
Or here’s a more obvious case: Suppose you bought a
stock because you had high expectations for a new
product. If the product turns out to be a dud, sell.

n The dividend is cut. The progression and security of

the dividend are important to any stock’s prospects. A

dividend cut or signs that the dividend is “in trouble”—
and perhaps taxes would cut into your gain, and you’d meaning that analysts or money managers are quoted
have to decide where to put the proceeds. By the as saying that they don’t think the company can main-
same token, you don’t want to bail out in a panic in the tain its payout to shareholders—can undermine the
aftermath of a steep market decline. stock price. Beware, incidentally, of stocks that sport
Here are some clues that will tell you when it is time unusually high yields relative to their history or to their
to consider selling a stock, no matter if you have made industries. The yield may be high because the share
a profit on it or not. price has dropped a lot. This often indicates that in-
vestors believe a company will cut its dividend.
n The fundamentals change. Whether you own

shares in a large Fortune 500 company or a company n You reach your target price. Many investors set spe-

most people have never heard of, you need to follow cific price targets, both up and down, when they buy a
the corporation’s prospects, its earnings progression, stock; when the stock reaches the target, they sell. A
and its business success as reflected in such things as good target might be to look for a 50% gain within
its products and services, market share and profit mar- two years or to limit your patience with a stock to a
gins. Annual reports, news stories, research reports loss of 20%. Such guidelines can prompt you to take
from brokerage houses and independent analysts, your gains in a timely fashion and to dump losers be-
and investment newsletters are fertile sources of such fore the damage gets too painful. Take the simple step
information, along with the references listed on page 10. of setting a “mental protective stop.” Keep track of the

9
www.investorprotection.org
 fact finding:
sources and what you’ll find inside
Headline goes here tk and here tk
The Web has made it easier than ever to conduct Analysts’ reports. Brokerage firms’ research de-
your own research on stocks. Below is a basic partments publish reports on companies that they
guide to locating the key facts on companies. follow. These reports contain financial numbers,
analysis and analysts’ stock recommendations,
Company Web sites. Spend some time on the in- such as buy, hold or sell. You can obtain reports
vestor-relations section of the company's Web such as these from your broker. Some online bro-
site. You will find a wealth of kers offer research produced by
information, such as stock- full-service brokerages, as well
price and dividend history, in- as independent research from
vestor presentations, and im- the likes of Standard & Poor’s
portant financial documents, and Argus Research.
such as the annual report. The Morningstar. This independent
annual report contains audited outfit made its name in mutual
financial statements from the fund research, but it also con-
most recent year, along with ducts fine research on stocks.
data from previous years. You You can obtain basic stock
can download the report from the Web site, ob- and stock-fund information free of charge at
tain a hard copy from the company’s investor-re- www.morningstar.com. For greater detail and
lations department, or request a copy through analysis of stocks and funds, Morningstar offers
your broker. a premium membership service for $199 a year.
Form 10-K. This document, which must be filed Value Line Investment Survey. Value Line offers
annually with the Securities and Exchange Com- a vast collection of data, including prices, earnings
mission, includes audited financial statements and dividends, stretching back years, along with its
and voluminous information on the company. analysis. Among the unique features is a “timeli-
You can obtain 10-K filings through company ness” rating for each of about 1,700 stocks as well
Web sites or through the SEC's EDGAR database as analyst commentaries. Available at libraries or
(http://www.sec.gov/edgar/searchedgar/ from Value Line ($598 a year; 800-634-3583;
companysearch.html). www.valueline.com).

10
the basics for investing in stocks
You can set your sell level anywhere
stock's price and sell any stock that hits your mental ual stocks yourself, you are effectively hiring an invest-
stop point. You can set your sell level anywhere, be it ment professional to analyze companies and stocks.
above the current share price or below the current The manager will decide when is an opportune time to
share price. Once you’ve reached your objective, take purchase and sell stocks.
the money. If the goals you set are very conservative, Funds are convenient. While you may need to pur-
you might miss some gains from time to time, but chase 20 to 30 stocks for adequate diversification, a
that’s better than holding on too long and falling vic- diversified mutual fund provides a one-stop approach
to spreading risk. For example, researching small-
company or foreign stocks can be especially daunting.
If the goals you set are very
But you can fill gaps such as these in your portfolio by
conservative, you might
buying small-company or foreign funds. In fact, you
miss some gains from time
can find funds that address almost any investment
to time, but that’s better than
holding on too long. strategy, broadly or narrowly defined.
Stock mutual funds, which you buy through an
intermediary (such as a broker) or directly from a
tim to the Wall Street maxim that says: “Bulls make fund sponsor, come in several varieties. Index funds
money. Bears make money. Pigs get slaughtered.” are passively managed funds that seek to mimic
a benchmark, such as Standard & Poor’s 500-stock
n What’s your return? With any investment, you should index.
judge performance by total return—essentially, the Actively managed funds are funds run by a man-
change in price plus any dividends you receive while ager who selects stocks according to his own assess-
holding the stock. For example, if you buy a stock for ment of their attractiveness. Exchange-traded funds,
$40, sell it a year later for $50 and receive a $2 dividend or ETFs, typically are a version of index funds. ETFs
payout during the year, your total return is roughly 30% trade like stocks on a stock exchange, and you buy and
(a 25% capital gain plus a dividend yield of 5%). sell them through a broker as you would an individual
stock. In all cases, it pays to be sensitive to fund fees,
Consider Mutual Funds which subtract from your returns.
There are a number of benefits to investing in stocks Mutual funds are particularly amenable to a
through mutual funds. Instead of researching individ- technique known as dollar-cost averaging. With this

11
www.investorprotection.org
Consider delegating stock picking to funds
strategy, you invest a fixed amount of money on a reg-
state securities ular basis. For example, if you have $10,000 you want
regulators to invest in a stock fund, instead of plunking it down all
at once, you might choose to invest $2,500 now and
State Securities Regulators have protected inves-
$2,500 three, six and nine months from the time of the
tors from fraud for more than 100 years. Securities
first purchase. Of course, anyone who invests every
markets are global, but securities are sold locally
payday through a 401(k) or similar plan is effectively
by professionals who are licensed in every state
dollar-cost averaging.
where they conduct business. State Securities
Regulators work within your state government to Dollar-cost averaging offers important psychologi-

protect investors and help maintain the integrity of cal benefits. It prevents you from investing all of your
the securities industry. money near what could be a stock-market top, seeing
the value of your investment drop, then having to sell
Your State Securities Regulator can: at a loss with a vow that you’ll never invest in stocks
n Verify that a broker-dealer or investment
again. And if you adhere to the program religiously, it
adviser is properly licensed;
forces you to keep buying stock funds as prices go
n Provide information about prior run-ins with
down—something many people would not do if left to
regulators that led to disciplinary or enforcement
their own devices.
actions; serious complaints that may have been
lodged against them; their educational back-
ground and previous work history; Wrap up. Stocks merit a substantial place in your

n Provide a Web site, telephone number or portfolio. Because stocks are volatile assets, they
address where you can file a complaint; and belong only in portfolios invested for medium- or
n Provide noncommercial investor education and long-term goals. Be sure you have a diversified
protection materials. blend of stocks that includes a helping of foreign
shares. Do your homework to ensure that you aren’t
For contact information for your State Securities
overpaying for the stocks. If you don’t have the
Regulator, visit the North American Securities
time, ability or inclination to buy and sell individual
Administrators Association (NASAA) Web site
stocks yourself, consider delegating this important
at www.nasaa.org and click on “Contact Your
Regulator.” responsibility to some well-chosen stock mutual
funds. n

12
the basics for investing in stocks
 glossary

Bear market. A period when a market declines. Mutual fund. A professionally managed portfolio of stocks,
bonds or other investments divided up into shares.
Book value. Also known as shareholder equity, this is the differ-
ence between a company’s assets and its liabilities. North American Securities Administrators Association
(NASAA). Membership organization for State Securities Regu-
Bull market. A period when a market increases.
lators who work to protect investors’ interests (www.nasaa.org).
Bond. An interest-bearing security that obligates the issuer to
Portfolio. The collection of all of your investments.
pay a specified amount of interest for a specified time (usually
several years) and then repay the bondholder the face amount Prospectus. The document that describes a securities offering
of the bond. or the operations of a mutual fund, a limited partnership or
other investment.
Capital gain (or loss). The difference between the price at
which you buy an investment and the price at which you sell it. Risk tolerance. Risk tolerance is the degree to which you are
willing to risk losing some (or all) of your original investment in
Central Registration Depository (CRD). A computerized data-
exchange for a chance to earn a higher rate of return. In general,
base that contains information about most brokers, their repre-
the greater the potential gain from an investment, the greater
sentatives and the firms they work for.
the risk that you might lose money.
Compound interest. This is really interest paid on interest.
State Securities Regulators. Agencies that work within state
When interest is earned on an investment and added to the
governments to protect investors and help maintain the integ-
original amount of the investment, future interest payments are
rity of the securities industry.
calculated on the new, higher balance.
Stock. A share of stock represents ownership in the company
Diversification. The method of balancing risk by investing in a
that issues it. The price of the stock goes up and down, depend-
variety of securities.
ing on how the company performs and how investors think the
Dividends. The portion of a company’s earnings paid out to company will perform in the future.
stockholders.
Street name. The term used to describe securities that are held
Dollar-cost averaging. A program of investing a set amount on in the name of your brokerage firm but that still belong to you.
a regular schedule regardless of the price of the shares at the
Total return. An investment-performance measure that com-
time.
bines two components: any change in the price of the shares
DRIP. Short for dividend reinvestment plan, it’s a program under and any dividends or other distributions paid to shareholders
which a company automatically reinvests a shareholder’s cash over the period being measured. With mutual funds, total-return
dividends in additional shares of stock. figures assume that dividends and capital-gains distributions
Earnings. A company’s after-tax profits. Commonly expressed are reinvested in the fund.
as earnings per share, or total earnings divided by shares out- Volatility. The degree to which a security varies in price. In gen-
standing. eral, the more volatile a mutual fund or stock, the more risk is
Exchange-traded funds (ETFs). Mutual funds that trade like involved.
stocks on the exchanges. Their portfolios generally track an in-
dex that represents a particular market or a slice of a market.

13
www.investorprotection.org
 where to find more
free information about investing

The following booklets from the Editors of Kiplinger’s Personal Finance magazine and the Investor
Protection Trust are available at your library and offices of State Securities Regulators.

Five Keys to Investing Success Getting Help With Your Investments

Make investing a habit Do you need a financial adviser?
Set exciting goals Who’s who among financial advisers
Don’t take unnecessary risks How to choose an adviser
Keep time on your side 5 questions to ask before you hire an adviser
Diversify How to open an account
What can go wrong
The Basics for Investing in Stocks How to complain
Different flavors of stocks
The importance of diversification Maximize Your Retirement Investments
How to pick and purchase stocks Three key rules
Key measures of value and finding growth Creating the right investment mix
When to sell Guidelines for saving at every life stage
What’s your return? Investing on target
Consider mutual funds Best places to save
Getting the money out
A Primer for Investing in Bonds Creating an income stream
How do bonds work, anyway? Protect your money: Check out a broker or adviser
How much does a bond really pay?
How to reduce the risks in bonds Where to Invest Your College Money
Going the mutual fund route The basics of investing for college
Investing in a 529 savings plan
Mutual Funds and ETFs: Locking in tuition with a prepaid plan
Maybe All You’ll Ever Need Other tax-favored ways to save
Mutual funds: The best investment Tax credits for higher education
The different types of funds Save in your child’s name?
How to choose funds and assemble a portfolio
Sources of mutual fund information
Where to buy funds

MONEY
SMART
LIVING
PERSONAL FINANCE

1100 13th Street NW

17 North Second Street, Suite 1300 Washington, DC 20005
Harrisburg PA 17101 www.kiplinger.com
1-800-722-2657 1020 19th Street NW, Suite 890 Washington, DC 20036
www.dobs.pa.gov www.investorprotection.org

A variety of noncommercial investor education and protection materials, including booklets, videos and curricula, are available and can be downloaded for educational
purposes at www.investorprotection.org and www.iInvest.org.