Frequently Asked Questions

Is it good to buy shares in XYZ now?

When should I buy into the stock market?

Why is it better to hold an index fund with 500 companies instead of stock in one or two companies?

What are the most important things to know before I start investing?

Why are stock prices rising while the COVID-19 death rate rises?

Will I lose money if I buy TIPS and deflation occurs?

When placing after hours orders, why does my brokerage want me to place a limit order?

Is it good to buy shares in XYZ now?

We typically don't answer such questions. For one, the answer often depends on the readers’ wealth, risk tolerance, etc. The answer may also change—a good deal today may not be so tomorrow due to price changes, share dilution, or other news. Last but not least, it’s often difficult or impossible to make such calls accurately. The current price of a share is the consensus price, often based on thousands of hours of analyst research and computer algorithmic analysis. To claim we know better than the consensus is often naive. Don’t believe us? Read about how Warren Buffett won a bet that a group of highly trained experts couldn’t beat an S&P 500 index fund.

If you search the web right now you’ll find an endless list of picks by various individuals and organizations. They’ll claim it’s a great time to buy this or sell that, and typically provide commentary to justify their case. Before you act on that advice, realize the following.

• Such views are not a consensus! The consensus value for a share of stock is the current price, not more or less. Why? Shares are traded on public exchanges and are subject to supply and demand phenomena. As soon as a majority thinks a stock is cheap, their purchasing (demand) drives the price up until it’s no longer true.
• Many times the person/organization providing the advice has not invested heavily in the stock. Either the person pushing this pick wasn’t able to convince the organization or he/she doesn’t even believe in the advice provided.
• You can often find contrary picks. At the time of this writing, a quick search reveals dozens of “experts” claiming Tesla is one of the best stocks you can buy now. However, there are also many experts claiming it’s the worst stock to hold now.
• Unfortunately, there are rare cases which appear to be malicious. People or organizations try to convince the public to buy shares of XYZ in order to sell theirs at a higher price.

When should I buy into the stock market?

There are specific scenarios in which individuals should change their asset allocation. However, general tips for timing the market, e.g. “ sell your stock now and buy back after the presidential election,” are contrary to the consensus. Stocks trade on public exchanges and prices are subject to supply and demand. The current price of a stock is the consensus value. There’s no reason for a majority of people to leave their money invested if they are convinced they can sell and buy shares cheaper next year.

For more information see our article about beating the market or investing psychology.

Why is it better to hold an index fund with 500 companies instead of stock in one or two companies?

Your expected average annual return will be the same whether you hold a single stock in the S&P 500 or an index fund diversified across the entire market. The reason an index fund is better for most people is that the volatility is typically much smaller. With a single stock you are exposed larger fluctuations. When things go south, you may end up panic selling, suffering stress or even depression. If the company goes broke you could lose everything. With the index fund you won't get the best or worst return, but you will get a more consistent, average return.

What are the most important things to know before I start investing?

(1) Don't invest money you'll soon need in a volatile asset (including the stock market). (2) Don’t expect to beat the market. (3) Most of the best returns are achieved by those who simply drop money into an index fund and leave it for many years.

Why are stock prices rising while the COVID-19 death rate rises?

This is related to the more general question about when to buy stocks, we recommend reading that answer. The current price of a stock has already accounted for the foreseeable future. In the case of COVID-19, each day new data and information become available. These alter the outlook including the length and severity of business closings, potential economic stimulus activity, etc. If the outlook today is better than yesterday (though still very bad), the price is likely to increase. Why? Because yesterday's price had factored in the even more negative outlook.

Will I lose money if I buy TIPS and deflation occurs?

For those unfamiliar, TIPS are US treasury inflation protected securities. They are treasury bonds whose principle is adjusted according to changes in the consumer price index (CPI). In other words, the principle increases with inflation, effective protecting the investor from inflation. Interest is paid twice a year as a fixed percentage of the principle (so the interest payment increases with inflation as well).

At maturity, if the principal is less than the security's original principal, you are paid the original principal. In other words, you are guaranteed to at least get back your original payment at maturity.

When placing after hours orders, why does my brokerage want me to place a limit order?

If you place an open order to buy/sell an asset, you forfiet control of the trade price. When trading volume is high (e.g. for popular assets during peak trading hours) you'll probably make that trade very close to the price of the previous and next trade. However, if volume is low (which happens more in off hours and/or with less popular assets) your trade could execute at a very undesirable price. This is because there may be a large spread between the largest limit buy order and the smallest limit sell order. For example, let's say the largest limit buy order is 90 USD and smallest sell order is 110 USD (even though the asset has been trading for 100 USD). If you place an open buy order you'll be matched to the 110 USD sell order and if you place an open sell order you'll sell at 90 USD. Either way, you'll suffer a quick 10% loss.

This is particularly important for large orders. If I place an open order to buy 10,000 shares, and the lowest limit sell order is just 100 shares at 1000 USD/share, I’ll only get 100 shares at that price. I’ll then be buying the next lowest sell order, which will be at a higher price. Let’s say this provides 1000 more shares at 1002 USD/share. I still have 8900 shares left to buy. By the time I purchase all 10,000 shares I could be paying substantially more than I anticipated. Paying this premium up front effectively reduces my returns.