Financial Poise
a neon green chart represents volatility in the market in this series on 'what is a stock?'

Investing Basics Installment #1: What is Stock? And Should You Buy Some?

Talk about bad timing, right?  Or maybe it’s audacity…

The world seems like it’s falling apart. You’re concerned about making sure you and your family remain healthy.  And your investment portfolio is taking a beating like it hasn’t taken since the 2008 financial crisis.

And I have the nerve to write an article about investing in stocks.

While stocks have moved up and down like yo-yos for the past many weeks, the trend is clear. As this article goes to press, all the major U.S. stock market indices are down substantially from their highs. The Dow Jones Industrial Average closed on Friday at its lowest level since December 2016. And last week both it and the S&P 500 saw their worst weekly performances since the 2008 financial crisis.

Is this a buying opportunity? Or is this just the beginning of a deep and sustained bear market?

Nobody knows. Jim Cramer doesn’t know. Suzy Orman doesn’t know. I certainly don’t know. If anyone tells you otherwise, then they’re stupid or they’re lying and hoping you’re naive enough to believe them.

I think the markets will continue to be choppy over the next several months or more, and they will continue to trend lower over the same period of time as the full economic impact of COVID-19 continues to be priced into the market.

This is not the time most investors should be investing in stocks.

What is happening today is driven by the inability of anyone to reasonably estimate when the economy can return to normal and by the consequential mass desire by investors to be holding cash. This is a once in a generation “black swan” event that has caused asset classes which are typically quite uncorrelated with each other to become more correlated with each other.  Stated more simply, people want to be holding cash right now because they do not know how low the stock market will fall and because, in many cases, they do not know when they or their dependents will be out of work; so they are selling all sorts of the investments to raise that cash.

Again, this is not the time most investors should be investing in stocks. It is, however, a great time to be learning about investing in stocks.

Introduction to this Series

This is the first of a series of articles intended to teach you about investing in the market. I start off pretty simply—what is stock? Each installment will build on those that came before it. You can choose to read them in the order in which they are published, but I do my best to write them so that you can read them in any order or as a stand-alone. By the time you read a few installments, you will be knowledgeable enough to start investing–very slowly–in the stock market.

What is Stock?

A share of “stock” is a type of investment. It represents a partial ownership in a business. If you are the sole owner of a business that is organized as a corporation, then you own 100% of the stock of that business. If you are the sole owner of a business that is organized as a limited liability company (“LLC”), then you own 100% of the membership interests of that business. An umbrella term that includes both stock in a corporation and a membership interest in an LLC is “equity.”

Equity (Stock or Membership Interest) in a Private Company

The vast majority of businesses in the United States are privately owned, and most of them are owned and operated by the same person or people. That is, they are not passive investments. I’m talking about the guy who owns and runs the deli you eat at, the husband and wife who own and operate the dry cleaners you take your clothes to, your lawyer who operates a law firm with her partner, and family who are the third-generation owners of that tool factory, bakery or jewelry store down the street.

Chances are that none of those people are going to sell you any of the equity in their company. It is more likely that one of them might be interested in selling you 100% of the equity in their business, although if you are interested in owning the entire business, then you may prefer to buy the assets of the business rather than the equity. Either way, buying an entire company (whether by buying its equity or its assets) is an entirely different topic. If you want to learn more about that, then check out the Financial Poise series, Business Transition and Exit Planning.

But let’s say you end up buying only some of the equity of one of their companies, as sometimes happens. In that case, you may be taking an active role in the management of the business. Or you may not be, and if that’s the case then you are making a passive investment in the equity of a private company. And if you are doing that, then you are buying an unregistered security.

This type of investment—making a passive investment in the unregistered securities of a company—is not the subject of this article or this series. It’s important, however, and if you want to understand more about investing in unregistered securities (whether in a single company via a private placement memorandum or in multiple companies via a private equity fund or venture capital fund, which in turn invest in the unregistered securities of private companies), then you can start by reading Alternative Assets and the “Average” Accredited Investor Installment #3 and What is the JOBS Act: 2019 Primer for the Private Company C-Suite Executive,

To be clear, however, these are not the type of securities you should consider buying unless you already have a thorough understanding, and substantial investment portfolio consisting of, registered securities.

Registered Securities (Stock) of Public Companies

With this context, let’s get to the main event: the title of this article asks what is stock, and should you buy some?

The answer to the second question is yes, but probably not right now, particularly if you are not a knowledgeable and experienced investor. Why?  First, if you start to invest today you will probably see losses pretty much right away because of market conditions. Second, you need some basic knowledge before you go to the stock market to buy some (if you read that literally and think that one “goes” to a stock market just like one goes to a supermarket, then you need a lot more context).

The answer to the first question, what is stock, is that when people talk about investing in the “stock market,” they mean stock that is registered and that trades on a national securities exchange, like the New York Stock Exchange or the Nasdaq. I’ll say it a few other ways: they mean companies that, at some point in the past, had an initial public offering; they mean companies whose stock prices are reported every day by the Wall Street Journal and many other newspapers; they mean companies whose prices are reported throughout each business day on the ticker at the bottom of the screen on television channels like Bloomberg and CNBC; and they mean many of the companies whose name you know.

So, when I talk about investing in “stock” (or the “stock market”), this is what I mean. And, again, yeah, you should be invested in the stock market. But if you couldn’t already answer this article’s main question, “What is a stock?” then you have a little more to learn before you invest.

Jonathan Friedland is not an investment advisor. He holds no relevant licenses, nor does he have formal education in the area of investing. He has, however, been a successful investor for more than 35 years. Jonathan is a corporate and corporate restructuring attorney who focuses his professional time on helping financially struggling businesses and their owners. He can be contacted at 312-704-2770.  For more information about Jonathan, see his bio here.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocation to Zero Coupon Bonds and Alpha, Beta & Other Key Concepts.]

©All Rights Reserved. March, 2020.  DailyDAC™, LLC d/b/a/ Financial Poise™

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About Jonathan Friedland

Jonathan Friedland is a senior partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…

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