faq

faq

@reddit

Found the internet!

FeedsHomePopularAllExploreValheimGenshin ImpactMinecraftPokimaneHalo InfiniteCall of Duty: WarzonePath of ExileHollow Knight: SilksongEscape from TarkovWatch Dogs: LegionNFLNBAMegan AndersonAtlanta HawksLos Angeles LakersBoston CelticsArsenal F.C.Philadelphia 76ersPremier LeagueUFCThe Real Housewives of AtlantaThe BachelorSister Wives90 Day FianceWife SwapThe Amazing Race AustraliaMarried at First SightThe Real Housewives of DallasMy 600-lb LifeLast Week Tonight with John OliverKim KardashianDoja CatIggy AzaleaAnya Taylor-JoyJamie Lee CurtisNatalie PortmanHenry CavillMillie Bobby BrownTom HiddlestonKeanu ReevesGameStopModernaPfizerJohnson & JohnsonAstraZenecaWalgreensBest BuyNovavaxSpaceXTeslaCardanoDogecoinAlgorandBitcoinLitecoinBasic Attention TokenBitcoin CashAnimals and PetsAnimeArtCars and Motor VehiclesCrafts and DIYCulture, Race, and EthnicityEthics and PhilosophyFashionFood and DrinkHistoryHobbiesLawLearning and EducationMilitaryMoviesMusicPlacePodcasts and StreamersPoliticsProgrammingReading, Writing, and LiteratureReligion and SpiritualityScienceTabletop GamesTechnologyTravelJoin redditCreate an account to follow your favorite communities and start taking part in conversations.Create an accountr/investing

r/investing

PostsWikiDaily DiscussionContact Moderators

  • If buy and hold works, why shouldn't I just use a leveraged fund to increase my returns?
  • What happens to companies and especially their stocks if they go bankrupt?
  • What are OTC F Shares?
  • What is a stock's beta and how does it relate to the stocks volatility?
  • What is a Wash Sale and How does it work?
  • What happens to my assets if my brokerage goes bankrupt? Do I lose my portfolio?
  • What is a SPAC?
  • What is a market correction
  • How do I participate in an IPO
  • How do I buy shares in a pre-IPO company
  • What are good online resources for portfolio construction?
  • Should I buy [insert ticker here]?
  • Is this [insert penny stock or newsletter here] a scam?
  • How do I invest in [insert country or sector here]?
    • I want to invest, but the market is at an all-time high. Should I wait?
  • Retirement Investing
    • What are the different types of retirement accounts?
    • What are the different types of tax treatments of retirement accounts?
    • I have money I am able to invest and I want to use it towards retirement. How should I invest it?
    • I just left my employer. What should I do with my workplace plan?
    • What is a call option?
    • What is a put option?
    • What is the difference between American and European style options
    • What is a bond?

Here are the most commonly asked questions which are found on r/investing, please look through this short list because it is highly likely that your question has already been answered by some very smart people!

This FAQ also aims to cover some questions that are asked implicitly: common misconceptions that are frequently corrected. For example, some people periodically think they have to decide between an index fund and a Roth IRA for a retirement investment. They don't explicitly ask "what are the different types of accounts, and what investments can I put into them," but rather ask questions (or make statements) that indicate that they don't know the distinction.

Please contact the moderators if you notice any inconsistencies or inaccuracies. Thanks.

This idea became very popular when Hedgefundie at Bogleheads decided to embark on their excellent adventure using leverage funds. The original thread here - https://www.bogleheads.org/forum/viewtopic.php?t=272007

Since then there have been many discussions on this topic in r/investing.

https://old.reddit.com/r/investing/comments/plqsds/whats_wrong_with_leveraged_funds/

https://old.reddit.com/r/investing/comments/nm50u3/are_leveraged_inverse_etfs_truly_as_evil_as_web/

https://old.reddit.com/r/investing/comments/odb582/are_leveraged_funds_worth_it_probably/

https://old.reddit.com/r/investing/comments/o5d8hu/why_is_holding_leveraged_etf_funds_a_bad_idea/

https://old.reddit.com/r/investing/comments/opr4y9/how_sound_is_investing_in_a_boglesstyle_portfolio/

https://old.reddit.com/r/investing/comments/nlkofd/why_not_use_a_leveraged_etf/

https://old.reddit.com/r/investing/comments/nl9l9d/buying_and_holding_leveraged_etfs/

https://old.reddit.com/r/investing/comments/m1hspa/a_case_for_leveraged_etfs/

https://old.reddit.com/r/investing/comments/mhe419/quantifying_beta_slippage_why_leveraged_etfs_are/

https://old.reddit.com/r/investing/comments/lj8jek/using_leveraged_etfs_for_a_less_volatile_higher/

https://old.reddit.com/r/investing/comments/lghmvv/consider_a_globallydiversified_leveraged_portfolio/

https://old.reddit.com/r/investing/comments/lq0tk9/margin_investing_in_leveraged_etfs/

https://old.reddit.com/r/investing/comments/o0fspu/if_margin_cost_is_less_than_the_average_return_of/

https://old.reddit.com/r/investing/comments/ooxu94/debunking_the_leveraged_etfs_are_not_a_longterm/

The best place to find the Fed calendar of events is on the Fed calendar site here - https://www.federalreserve.gov/newsevents/calendar.htm

Normally, there will also be links to the live speeches. The speeches by officials are also transcribed and saved here - https://www.federalreserve.gov/newsevents/speeches.htm

Minutes of meetings and the latest press release are published here - https://www.federalreserve.gov/newsevents.htm

In the US, when a company goes bankrupt, they are likely filing chapter 11 or chapter 7 of Title 11 in US bankruptcy code.

Chapter 11 is a way to protect the company from creditors while the company is reorganized. The court will appoint a group to protect the interest of creditors while the company is reorganized. In the case of chapter 11 usually the creditors take over the company. Let's say ABC goes bankrupt by filing for chapter 11 protection. Usually the stock is renamed to ABCQ. The company may survive, it also may do another IPO and re-list ABC as a new offering back on the market. However previous share holders are stuck with an almost worthless ABCQ shares. Sometimes previous share holders are given a small portion of the re organized company like 1%. Meaning of you held 100 shares of ABCQ you might get 1 share of ABC the new company.

In a chapter 11 bankruptcy, in most cases share holders get wiped out or take a 98%+ loss. There are rare exceptions. Hertz went bankrupt, during liquidation the used car market went insane, and Hertz had enough assets to pay back the creditors and share holders got about $1.50 a share, what is highly unusual.

In Chapter 7, the company is considered insolvent and a trustee is appointed to liquidate all the assets of the firm. Debt are paid out based on priority. As a shareholder of a chapter 7 company, equity holders are the absolutely last category to be paid back and shares are almost always worthless.

Saving a failing company usually means raising more capital because the company cannot generate enough revenue to offset it's debt payments.

Non-US companies normally may be listed as ADRs on US exchanges. But it is possible to sometimes trade a foreign company in the US on the OTC markets. These are sometimes known as F shares. The FAQ on F shares can be found at the OTC markets site here - https://www.otcmarkets.com/files/FAQ-F-Shares.pdf Note that not all brokers provide access to OTC markets. And brokers normally charge an extra fee for OTC transactions. Also, note that there may be foreign taxes which are wildheld based on the country where the shares are actually listed.

From a layperson's point of view - beta is a correlation against the market. And in many cases, the S&P 500 is used as a proxy for the market.

Volatility is considered how much a stock moves in relationship with the market.

A beta of 1.0 would mean that the stock correlates with the market.

A beta of 2.0 would mean that a stock moves twice as much as the market. I.e the higher the beta, the more volatile the stock.

A negative beta means that a stock moves inverse of the market. Ie a -2.0 would mean that the stock goes down 2x if the market moves up. For example, $spxu

A beta between 0 and 1 would be a stock that is less volatile when the market moves.

To find stocks which are less volatile, you can use a stock screener that supports beta and search for stocks between 0 and 1.

If you are obligated to pay taxes in the US, a wash sale is an IRS rule to prevent abuse of tax deductions of capital gain losses. The rule exists to discourage purposely timing losses for the specific purposes of reducing taxes on short term transactions where you might otherwise have held through the downturn and posted the same gain. If you run into a wash sale, from a practical perspective - it means that your cost basis on the re-purchase is adjusted up and that you cannot take the deduction of the prior sale.

For example:

Buy 1 share of $100 of stock A
Sell 1 share of stock at $75, 5 days later
Buy 1 share of stock A at $50, 5 days later
Sell 1 share of stock A at $80

The first sale is a wash sale so the $25 loss cannot be deducted. But you can add the $25 to the cost-basis of the $50 purchase so your cost basis on the new share is $75. When you sell for $80, the taxable gain is $5.

Wash sales really aren't that scary. Some brokers may sometimes indicated that you have a wash sale if you don't actually sell the first tax lot. When this occurs, it's possible that the broker is cost-averaging all your tax lots. From a tax perspective, it shouldn't actually impact you. Contact your broker if you are concerned. Most full-service brokers will properly adjust the cost basis on your 1099b.

If you want to read more about the nuances - please look at the Wash Sales section of IRS Pub 550 - which you can find here - https://www.irs.gov/publications/p550#en_US_2020_publink100010601

In the United States, all registered broker-dealers that sell stocks or bonds to the investing public, clear such transactions are required to be members of SIPC. SIPC or Securities Investor Protection Corporation is a member-based organization which is focused on protecting the assets of an investor if a broker-dealer becomes insolvent. SIPC steps in when a broker-dealer fails and assets are missing from customer accounts. More information about what SIPC protects can be found here - https://www.sipc.org/for-investors/what-sipc-protects

The term SPAC stands for special purpose acquisition company. It is a blank-check company or a shell company which is created as a publicly traded company solely for the purpose of acquiring or merging with an existing company. SPACs are using the public markets to raise capital which is then used to acquire another business. SPAC IPO's are typically priced at $10/share. To learn more about SPACs - read the following SEC bulletins:

https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin

https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/celebrity

A market correction is normally defined as a 10-20% decline (some say at least 15%) from a recent high of the Dow Jone and/or S&P 500 indices. The definition of recent high usually considered the past 3 months. You can read more about market corrections here:

https://www.schwab.com/resource-center/insights/content/market-correction-what-does-it-mean

https://intelligent.schwab.com/article/stock-market-corrections-not-uncommon

https://www.merrilledge.com/article/how-weather-stock-market-correction

If your broker has shares to distribute in and IPO, you will have to submit an indication of interest with your broker to participate in that IPO.

Brokers have relationships or are part of an underwriting syndicate will have access to specific IPOs. Depending on how many shares your broker gets - the broker will typically have a random allocation process to distribute shares. It is essentially a lottery system so for oversubscribed IPOs, the likelihood to get an allocation is low. All brokers that offer IPOs will also have rules around how long you must hold any allocated shares otherwise you may be considered a flipper and your account can be banned from future IPO participation. Also - because IPOs are inherently riskier - many brokers will require that an account with minimum cash or other asset balance.

There are generally 5 ways for retail investors and non-institutional investors to participate in a private company that may eventually IPO or be acquired.

  • The most common way is to be granted shares, options, or warrants by the company. This is normally done for employees, vendors, board members, advisors, etc. as incentive or compensation. If the company eventually goes public or is acquired - then the shares could be worth something.

  • The second way is to buy shares through a company's Reg D offering. You must qualify under SEC Regulation D as an accredited investor. An accredited investor is someone that is considered a "sophisticated" investor and understand how to value companies and understand the risks of the capital markets. There are also minimum asset and income requirements for an accredited investor since many startups and private placement shares end up worthless or illiquid for years.

  • The third way is through a Reg A offering. Reg A offerings are exempt from SEC registration requirements. This type of offering is when a company is raising less than USD$50 million in a 1 year period. Reg A offerings are typically very risky.

  • The most recent way is through Reg CF offerings. Reg CF or Reg Crowd Sourcing is a newer SEC exempt offering through an SEC-registered intermediary such as a broker-dealer or funding portal. Offerings are limited to USD$1,070,000 in a 12-month period and other restrictions.

  • Secondary transactions can also provide access to pre-IPO and private companies. In a secondary transaction, you would be buying shares from an existing shareholder. Note that liquidity and price discovery can be difficult. Private placement fees can vary but there are some markets which offer shares of startups and potential pre-IPO companies for a reasonable fee. Private placement brokers can charge from 4%-6% of the transaction. It is common for companies to have a ROFR (right of first refusal) clause in the share agreement so the company or an existing investor can step in to buy the shares at the price you offered to the seller. Transactions can sometimes take weeks to months to close depending on closing requirements by the company.

There is no guarantee that any of these companies will go public or be acquired.

If you are new to investing - you may want to learn a bit more about how the capital market works first. If you really want to participate in IPOs and take the risk - you can always invest in ETFs which track IPOs - the most popular is $ipo and $ipos. This list may be helpful as well - https://www.etf.com/channels/ipo

Permanent Portfolio Introduction: http://investingguy.blogspot.com/2009/09/harry-brownes-permanent-portfolio.html

Asset Correlation - Asset Interaction Data: http://www.assetcorrelation.com/

Fire Calc - Portfolio Historical Success Rates: http://firecalc.com

Sig Fig - Online Portfolio Manager: http://sigfig.com

Reading Room - Academic Papers & Articles: http://www.altruistfa.com/readingroomarticles.htm

This question falls under the "Taking advice from complete strangers" method of investing. Would you walk into the street and ask complete strangers for advice? Doing so on the internet is exactly that. For most people asking this question with larger sums of money, it is advisable you seek out a financial adviser from your local bank or brokerage.

While many active traders will have opinions and predictions, some will work out and some will will not. If you are going to take advice from another trader, be aware that you may lose money since nobody here had a crystal ball and can predict the future exactly as it will unfold.

Moreover, many of the stocks that you may be most interested in are popular, news-worthy, large-cap equities - ask yourself: with something so well-discussed, what do you know that the market does not know about its current valuation or future price?

Yes. Read StockJock-e's AMA about the inner workings of the penny stock world.

How do you invest in Brazil? Or the Euro? Or in industrial metals? What ever you are looking for, there is most likely an ETF which tracks the sector. Here is an ETF database with an extensive list of everything you can think of:

http://etfdb.com/types/

Please keep in mind, however, that if your theory is based on some news article you read about the inevitable growth in X sector or Y country that you may be piling onto an already-overvalued market segment. Always ask yourself: do I really understand and know that I know better than the market? A rule of thumb: if you're here asking how to invest in something or somewhere, you may not be experienced enough to know whether to invest in that company or place.

I want to invest, but the market is at an all-time high. Should I wait?

Let's ignore for the moment whether the market is, in fact, at an all-time high. Time in the market generally beats timing the market, and if you're asking this question, you almost certainly don't know enough about the market to time it (don't worry - neither do most people). If you're planning to buy-and-hold, now is the time to do it.

What are the different types of retirement accounts?

The two main types of retirement accounts are employer-sponsored and self-directed. Of course, there is some overlap if you are self-employed; this question assumes that you aren't.

  • An employer-sponsored plan is provided to you at work; how you qualify to be able to contribute to the plan is dependent on your employer. The most common employer plan type is a 401(k). Typically, you can only contribute to these via paycheck deductions, not by transferring money. Of course, there's no reason you can't use the money already in your bank account for expenses and deduct that much more from your paycheck if you would like to do so.
    Many employers will "match" some of your contributions: if you put a portion of your paycheck into your retirement savings, they'll put a similar amount in.
    In 2020, the limit is $19,500 for individual contributions to these accounts. The match from your employer does not count towards this limit. The individual limit is higher if you're over 50.

  • An Individual Retirement Account (IRA) is one that you provide, independent of an employer. The limit in 2020 for contributions is $6000 (higher if you're over 50).

Both of these accounts commonly have the two different types of tax treatments available to them (see next question), although not every employer offers a Roth 401(k).

What are the different types of tax treatments of retirement accounts?

A "traditional" retirement account is pre-tax: the money you put in doesn't get taxed as income. However, the money you withdraw in retirement is treated as income that year.

A "Roth" retirement account is post-tax: the money is taxed in the year you earned it. However, withdrawn money in retirement is not treated as income.

In both cases, withdrawals in retirement are those made after the year in which you turn 59.5.

Note that Roth is named after a person and is not an acronym; the correct usage for an IRA (for example) is a "Roth IRA," not a "ROTH IRA."

I have money I am able to invest and I want to use it towards retirement. How should I invest it?

As a general rule, it is typically advised to contribute in this format:

  • Contribute to your workplace plan up to the employer match.

  • Contribute to your desired IRA up to the limit.

  • Contribute to your workplace plan up to the IRS limit.

If there is still money you wish to invest towards retirement after this, you need to go with other accounts.

This is not a hard-and-fast rule; for example, if your income is such that you cannot use either form of IRA (and if, for whatever reason, you aren't going to use the backdoor Roth IRA loophole), you won't use the second step. Alternately, if your workplace has better mutual funds than you can get in your IRA, and that is your preferred investment vehicle, you might want to max that before using the IRA.

I just left my employer. What should I do with my workplace plan?

There are four options here. Note that not every option is always available - for example, not every employer plan allows you to keep it as such, and not every employer plan accepts funds to be brought in from another plan. The process of moving money from one retirement account to another is known as a "rollover."

  • Roll the plan to an IRA. It is typically advised to keep the money within the same tax treatment - move traditional 401(k) funds to a traditional IRA (sometimes labeled a "rollover IRA") and Roth 401(k) to a Roth IRA. This is the most common choice.

  • Leave it where it is. If your old plan has great funds, or if your new plan doesn't accept rollovers and you would like to avoid having a traditional IRA, this is typically the choice used.

  • Move the funds to your new employer plan. This is typically done if the new plan has fantastic fund choices.

  • Cash out the money; note that this involves paying tax on the money brought out and early withdrawal penalties. This is almost always a bad decision.

What is a call option?

If you own 1 call contract, you own the option to buy 100 shares of the underlying at the strike price. I.e you own the right to "call" the shares from the contract counterparty.

What is a put option?

If you own 1 put contract, you own the option to sell 100 shares of the underlying at the strike price. I.e you own the right to "put" the shares to the contract counterparty.

What is the difference between American and European style options

On the US options markets, most equity options are American-style. Index options such as SPX and RUT are European-style. An American style option allows the option contract holder to exercise the contract at any time before expiration. European-style options are exercised only at expiration.

What is a bond?

Bonds are debt instruments that guarantee the owner a fixed payment stream for a period of time (typically they have a "coupon" which is the interest rate they pay out and a duration which is when they expire at which point you would get the principal back. Some bonds can be called early (before expiration date). When other payment streams get more attractive (for instance if interest rates go up and other bonds are paying out more) then the exchange value of the bond can go down (what you can sell it for to somebody else), but the interest payments continue unchanged. In this situation you can lose capital if you sell the bond and book a capital loss. If the bond increases in exchange value then you can sell it for a capital gain. Bonds pay out money into your account.

A bond ETF is traded like any other ETF. Cycle for dividend/interest distributions depends on the ETF, typically quarterly or monthly. ETFs trade like stocks so are easy to get at with normal trading methods.


This page is under construction. Near future topics to be addressed include asset classes and shorter term (non-retirement) investing, along with a description of common investing styles.

Last revised by greytoc - 3 months agoAbout CommunityWelcome to investing2.0m

Members

6.1k

Online


Created Mar 15, 2008r/investing Rules1.Discuss news items relevant to investors

2.Do not make posts looking for advice about your personal situation.

3.Keep discussions civil, informative and polite.

4.Strictly no (self-)promotion or solicitation threads

5.General corporate news and political posts guidelines

6.Effort: Posts must meet standards of effort

7.Original Sourcing: articles posted must be from the orignal source on a best efforts basis

8.Good faith discussions and comments only

FAQ

  • Our Wiki
  • How do I get started in the Stock Market?
  • WSJ guide on how to pick a financial planner
  • Why we recommend Vanguard
  • Compare brokers (US mostly)
  • Should I invest a lump-sum, or wait? It's about time in the market, not market timing & Vanguard's thoughts on lump-sum investing
  • I'm new to investing, what should I do? This has been asked and answered many times in the past. Use the search function or check out this, this, this, this, this or this thread.

Useful Online Resources

  • A guide to stock research! - A hedge fund analyst explains his stock research process. Full of excellent links to videos, articles, and books. MUST READ!
  • Our favorite websites
  • And podcasts
  • Investopedia

Reading List

  • Our Favorite Books
  • A huge list of the best books on investing
  • Our favorite whitepapers & blogs
  • Warren Buffett's Shareholder Letters

Related Community List

r/SecurityAnalysis

180,264 members

r/Accounting

286,789 members

r/personalfinance

15,958,561 members

r/business

720,466 members

r/finance

697,052 members

r/options

865,534 members

r/algotrading

1,463,226 members

r/realestateinvesting

1,418,717 members

r/econmonitor

31,769 members

Disclaimer

Reddit, r/investing and its moderators assume no responsibility for the accuracy, completeness or objectivity of the information presented on r/investing. r/investing does not endorse any recommendation or opinion made by any member, nor do any users or moderators of r/investing advocate the purchase or sale of any security or investment. You are responsible for your own investment decisions. Please consult with a registered investment advisor before making any investment decision.

ModeratorsModerator list hidden. Learn MorehelpReddit coinsReddit premiumaboutcareerspressadvertiseblogTermsContent policyPrivacy policyMod policyReddit Inc © 2022. All rights reserved

Advertisement

Report Page