What and how to invest in

1. What the American stock exchange is and why investors need brokers.
2. How the main investment instruments in the American market work.

A stock exchange is a market where securities are traded. For instance, the US has several major exchanges, including the New York Stock Exchange (NYSE) and NASDAQ. These exchanges oversee all transactions, ensuring adherence to rules and the integrity of trades.

To access the American stock market, investors, including those from Hungary, require a broker.

A broker is a company with the appropriate licenses that offer individuals the opportunity to trade on the exchange, charging a commission for their services. An investor opens an account with a broker, deposits funds, and then conducts trades on the stock exchange through this broker.

In the past, to buy or sell shares, one had to physically go to the stock exchange or call a broker. However, with the advancement of technology, now you can choose a broker online, sign a contract with them, and quickly gain access to trading on the American market — through specialized software, a web interface, or a mobile app. Physical shares no longer exist; all transactions are now electronic.

On American exchanges, such as the NYSE and NASDAQ, there are numerous segments referred to as markets. On these markets, you can purchase stocks, currency, precious metals, and even agricultural goods.

The primary focus is the stock market. However, aside from stocks, you can also acquire other investment instruments, such as bonds and ETFs. Despite their technical names, these instruments are quite straightforward to understand.

Stock

A stock represents a portion of a company, a share in its business. When you buy stocks of an American company, for instance, Apple or Microsoft, you essentially become a co-owner of that company and can lay claim to a part of its profits.

There are two main ways to earn from stocks: through a difference in stock prices (bought cheaper, sold at a higher price) or through dividends - when the company shares a portion of its profit with its shareholders. Let's consider an example.

Imagine you have a farmer friend in Texas who offers you to buy a bull with him. Your share in this bull is your stock. If the bull proves successful in breeding, its offspring will be sold, and you will receive a portion of the profit from this sale. This profit is your dividend.

However, if the market value of the bull doubles and you decide to sell your share to another investor, you will earn from the price difference. But in this scenario, you will no longer receive dividends.

Risks are also involved: the bull could fall ill, or the demand for meat might drop due to economic fluctuations. In this case, your share will yield less profit, and selling your share might become less lucrative.

Stocks — when you buy a share in an American company.

How to Earn:
1. Through dividends - when a company shares a portion of its profits with shareholders.
2. Through stock price appreciation - when a company's business grows and the stock price increases.

Suitable for: Investors who are willing to study the market and make informed choices, investing in the right company.

ETF

Imagine you decided to have a slice of a delicious cake. You have two options. You can either bake the cake yourself, spending time choosing a recipe, buying ingredients, and going through the baking process. Or, you can simply buy a ready-made slice of cake from a cafe or restaurant.

Funds, or ETFs (Exchange Traded Funds), operate on a similar principle. They create a portfolio of various securities, and then offer investors the chance to buy a share in this portfolio, eliminating the need for them to form such a portfolio on their own.

An ETF portfolio can include stocks, bonds from different companies, or even track the price dynamics of specific commodities. Each ETF has its own rules for portfolio composition.

Many of these funds also receive dividends from the stocks that are part of their portfolio. Some funds distribute dividends to their investors, while others reinvest them, increasing the volume of their assets.

One of the advantages of ETFs is risk diversification. Even if the value of one asset drops, the loss might be offset by the performance of other assets in the portfolio. Additionally, investing in an ETF might require less capital than purchasing each asset of the portfolio individually.

ETF — Investing in a broad portfolio through a single instrument.

How to Earn: through dividends (if the ETF distributes them) or through the appreciation of the ETF's stock value (if dividends are reinvested).

Suitable for: those who aren't prepared to delve into the details of each individual stock or bond but wish to have a diversified portfolio.

Bonds

Suppose a company wants to expand its production and needs funds for that. An investor then lends money to the company and, in return, receives a bond - a promissory note stating how much money the company has borrowed, how much it commits to repay, and in what timeframe.

Bonds are beneficial for the company: it can obtain funds at a lower interest rate than at a bank. They are also advantageous for the investor: they can invest money at a higher interest rate than offered by banks.

The key is choosing the right entity to lend to. Generally, the more reliable the debtor, the lower the interest rate they're willing to accept. If a company proposes to borrow money at an annual rate of 25%, there's a high chance they might not be able to repay it.

However, it's worth noting that bonds in the American market might be a bit pricey for many investors. In this scenario, Hungarian investors should consider funds that deal with bonds. These funds offer a more accessible way to invest in bonds and can provide a variety of investment strategies.

The stock exchange is a vast platform where stocks, bonds, and more are traded.
A broker is an intermediary that allows a regular private investor to access the stock exchange. One cannot trade without them.
Bonds are debt securities. When an investor purchases a bond, they are lending money to a company or a government at a certain interest rate.
Stocks represent a share in a company. The owner of a stock is entitled to a portion of the profit that the company makes.
ETF stocks represent a share in a fund that has purchased a multitude of other stocks or bonds. If an investor owns a share in an ETF, they own a portion of all the assets within that ETF.

What's next?
In the following lessons, we will delve into each point in detail.