How does investing in stocks work?

[loxs]

Hello, and sorry if this seems too obvious to you. But I search and read quite a lot, and still don't have a good understanding about the questions I'm going to ask here. Most of my knowledge is like a "cooking book". I know how people invest, I know what and why is high risk, low risk etc. I mostly understand the ideas on "why investing works". But I lack knowledge on the technical aspects of it. So, here are my questions.

• When I buy "stocks fund", what is it that technically happens? Do I in fact own a small part of a company? To what extent do I "own" those shares? If the fund "magically" vanishes, do I still own them?
• Do I have any legal documents for the above? Is it issued by each individual company the fund invested my money in? If not, how am I guaranteed (1.) if at all?
• Is it possible to transfer my stocks from one fund to another, without technically selling and buying them again? And in general, what is the "role" of the fund, and what are their rights over that stocks?
• Is it possible to actually choose the exact companies I get my money invested in?

[GreenGuava]

Hello, and sorry if this seems to obvious to you. But I search and read quite a lot, and still don't have a good understanding about the questions I'm going to ask here. Most of my knowledge is like a "cooking book". I know how people invest, I know what and why is high risk, low risk etc. I mostly understand the ideas on "why investing works". But I lack knowledge on the technical aspects of it. So, here are my questions.

Nothing to be sorry for.  You may or may not want to invest, but the first rule is: always understand what you're investing in.   So you come to a forum with people who are interested in it, and who like to talk about it.  That's a good group to ask.

With that in mind, let's discuss your questions.

• When I buy "stocks fund", what is it that technically happens? Do I in fact own a small part of a company? To what extent do I "own" those shares? If the fund "magically" vanishes, do I still own them?

Funds don't magically vanish;  think of them as mini companies who invest in assets (stocks, bonds, etc) according to a plan.  They still have the underlying assets, and thus can't vanish.  A provider can liquidate the fund, but then you get the value from the sale.

• Do I have any legal documents for the above? Is it issued by each individual company the fund invested my money in? If not, how am I guaranteed (1.) if at all?

The mutual fund owns the assets, and you own that fraction of the mutual fund - and thus, that fraction of the assets.  You won't get an individual certificate from the issuing company.

• Is it possible to transfer my stocks from one fund to another, without technically selling and buying them again? And in general, what is the "role" of the fund, and what are their rights over that stocks?

No, but you can sell one fund and buy another.  In a tax-advantaged account, such as an IRA or a 401(k), this is not a taxable event.

The role of the fund is to pool the investors' money and purchase assets accordingly.  They're considered the owner of the stocks, at least as far as participation in company management goes.

• Is it possible to actually choose the exact companies I get my money invested in?

Yes.  If you have a specific set of companies you want, you could just buy those stocks and skip the mutual fund entirely.  Alternately, you could look for a mutual fund that will limit itself to companies you consider acceptable (for whatever definition you hold).  For example, there are stock mutual funds that won't invest in tobacco companies or gambling establishments -- if your objection is to these sorts of businesses, such a fund might be more appropriate for you than a broad market index - although you'll likely pay more for it due to economy of scale and management costs.

Suggested additional reading:  Bogleheads Wiki: Mutual Fund

[dragoncar]

Hello, and sorry if this seems to obvious to you. But I search and read quite a lot, and still don't have a good understanding about the questions I'm going to ask here. Most of my knowledge is like a "cooking book". I know how people invest, I know what and why is high risk, low risk etc. I mostly understand the ideas on "why investing works". But I lack knowledge on the technical aspects of it. So, here are my questions.

Nothing to be sorry for.  You may or may not want to invest, but the first rule is: always understand what you're investing in.   So you come to a forum with people who are interested in it, and who like to talk about it.  That's a good group to ask.

With that in mind, let's discuss your questions.

• When I buy "stocks fund", what is it that technically happens? Do I in fact own a small part of a company? To what extent do I "own" those shares? If the fund "magically" vanishes, do I still own them?

Funds don't magically vanish;  think of them as mini companies who invest in assets (stocks, bonds, etc) according to a plan.  They still have the underlying assets, and thus can't vanish.  A provider can liquidate the fund, but then you get the value from the sale.

• Do I have any legal documents for the above? Is it issued by each individual company the fund invested my money in? If not, how am I guaranteed (1.) if at all?

The mutual fund owns the assets, and you own that fraction of the mutual fund - and thus, that fraction of the assets.  You won't get an individual certificate from the issuing company.

• Is it possible to transfer my stocks from one fund to another, without technically selling and buying them again? And in general, what is the "role" of the fund, and what are their rights over that stocks?

No, but you can sell one fund and buy another.  In a tax-advantaged account, such as an IRA or a 401(k), this is not a taxable event.

The role of the fund is to pool the investors' money and purchase assets accordingly.  They're considered the owner of the stocks, at least as far as participation in company management goes.

• Is it possible to actually choose the exact companies I get my money invested in?

Yes.  If you have a specific set of companies you want, you could just buy those stocks and skip the mutual fund entirely.  Alternately, you could look for a mutual fund that will limit itself to companies you consider acceptable (for whatever definition you hold).  For example, there are stock mutual funds that won't invest in tobacco companies or gambling establishments -- if your objection is to these sorts of businesses, such a fund might be more appropriate for you than a broad market index - although you'll likely pay more for it due to economy of scale and management costs.

Suggested additional reading:  Bogleheads Wiki: Mutual Fund

Regarding the magically vanishing fund, remember that in a mad off situation (basically fraud), the funds can in fact magically disappear and you get little or nothing back.  Some would find it prudent to diversify between similar funds with different management for this reason.

Edit: likewise your brokerage account should be insured by SIPC, but some would advocate diversifying brokerages in the same way you might diversify banks.

[loxs]

Suggested additional reading:  Bogleheads Wiki: Mutual Fund

I have read that exact article. And although I don't fully understand it yet (not a native speaker), it's pretty much OK. What I was lacking was the blunt technical aspects, which you very clearly demystified.
Thanks!

[loxs]

Yes.  If you have a specific set of companies you want, you could just buy those stocks and skip the mutual fund entirely.

So, my next endeavour will be to find out how one does that. I certainly want to put some part of my portfolio into high risk "I believe in this company" investments.
Can this be done online? Especially from abroad (EU)?

[beltim]

So, my next endeavour will be to find out how one does that. I certainly want to put some part of my portfolio into high risk "I believe in this company" investments.
Can this be done online? Especially from abroad (EU)?

Yes, but the specifics depend on the particular country. You need to find a brokerage licensed in your country, and there may be a special account type needed to trade stocks that trade in other countries.

[pom]

There are quite a few people in the EU here that invests in individual stocks. It would help if you mention your actual country so we can direct you to more specific information.

[loxs]

My country is Bulgaria (at least yet, I plan to move). Last week I started a thread that will show you very well how I don't want to invest via Bulgarian companies:

https://forum.mrmoneymustache.com/investor-alley/how-crazy-is-this-investment-fund/

For now, I'll probably start with Keytrade  from this list:
http://the-international-investor.com/comparison-tables/offshore-fund-supermarket-comparison-table

At least until I get the feel of it all. But anyway, thanks all for the help.

[GreenGuava]

Regarding the magically vanishing fund, remember that in a mad off situation (basically fraud), the funds can in fact magically disappear and you get little or nothing back.  Some would find it prudent to diversify between similar funds with different management for this reason.

Edit: likewise your brokerage account should be insured by SIPC, but some would advocate diversifying brokerages in the same way you might diversify banks.

I don't understand diversifying banks, either:  I keep between $20k and $25k in cash (which will decrease as the size of my taxable investments increase) at the bank, well under the FDIC limit.

There are also ways to avoid the Madoff situation entirely:  stick with long-understood acceptable investments.  Never go with an "investment" that holds custodianship of their own assets (for those wondering, Vanguard funds' assets are held by JP Morgan and audited by PWC).  Never invest in something you don't understand - especially if it seems too good to be true.

But I did make the assumption that OP was going with traditional stocks and mutual funds, and I should have stated that.

[loxs]

Never go with an "investment" that holds custodianship of their own assets (for those wondering, Vanguard funds' assets are held by JP Morgan and audited by PWC).

Could you explain what this means, please? It's another "technicality" I don't understand.

[dragoncar]

Regarding the magically vanishing fund, remember that in a mad off situation (basically fraud), the funds can in fact magically disappear and you get little or nothing back.  Some would find it prudent to diversify between similar funds with different management for this reason.

Edit: likewise your brokerage account should be insured by SIPC, but some would advocate diversifying brokerages in the same way you might diversify banks.

I don't understand diversifying banks, either:  I keep between $20k and $25k in cash (which will decrease as the size of my taxable investments increase) at the bank, well under the FDIC limit.

There are also ways to avoid the Madoff situation entirely:  stick with long-understood acceptable investments.  Never go with an "investment" that holds custodianship of their own assets (for those wondering, Vanguard funds' assets are held by JP Morgan and audited by PWC).  Never invest in something you don't understand - especially if it seems too good to be true.

But I did make the assumption that OP was going with traditional stocks and mutual funds, and I should have stated that.

Well I guess banks don't make sense unless you are talking over the FDIC limit (or if you can't wait months for FDIC to reimburse the amount you lost... )

A fraud situation can happen anywhere.  Maybe not madoff style exactly, but any mutual fund could lie about its assets.  Bribe auditors, etc.  Even with "legal" trickery you could see a Lehman situation (I mean most people after the fact would say there was underhanded stuff going on, but ernst and young signed off!)

I don't think anyone can truly "understand" their investment in a mutual fund.  In that they haven't seen the sec filing for every constituent stock, and even if they did that's not the full picture.  They don't know what the sales numbers were for Tallahassee last Friday. 

[pom]

Loxs, forget about the FDIC limit (amount of money protected in case a US bank goes bankrupt), it does not apply to someone in Bulgaria investing through a Swiss broker.

[loxs]

Loxs, forget about the FDIC limit (amount of money protected in case a US bank goes bankrupt), it does not apply to someone in Bulgaria investing through a Swiss broker.

OK, that seems fair enough.

But then, what would be the case for someone in Bulgaria, investing through a Luxemburg (EU) broker (Keytrade) into one of the new Vanguard ETFs like VUSA [1] which is technically an Irish (EU) company (is this correct?) traded at ERONEXT Amsterdam?

Also, could someone explain this situation to me, please? Who in the above situation has what rights, owns what and can do what kind of criminal things to my money?

[1] http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0000YXKB

[kyleaaa]

Hello, and sorry if this seems too obvious to you. But I search and read quite a lot, and still don't have a good understanding about the questions I'm going to ask here. Most of my knowledge is like a "cooking book". I know how people invest, I know what and why is high risk, low risk etc. I mostly understand the ideas on "why investing works". But I lack knowledge on the technical aspects of it. So, here are my questions.

• When I buy "stocks fund", what is it that technically happens? Do I in fact own a small part of a company? To what extent do I "own" those shares? If the fund "magically" vanishes, do I still own them?
• Do I have any legal documents for the above? Is it issued by each individual company the fund invested my money in? If not, how am I guaranteed (1.) if at all?
• Is it possible to transfer my stocks from one fund to another, without technically selling and buying them again? And in general, what is the "role" of the fund, and what are their rights over that stocks?
• Is it possible to actually choose the exact companies I get my money invested in?

1.) Yes, you legally own a small part of the company. Or rather, the mutual fund legally owns a small part of the company and you legally own a small part of the mutual fund. Mutual funds cannot magically vanish. It has never happened and the chances of it ever happening are vastly lower than winning the lottery 18 times in a row during a zombie apocalypse on the moon.

The Madoff situation is not at all comparable. What CAN vanish is the fund manager. And yes, in that case you still own the fund. Mutual funds themselves are always legally separate from the fund companies that manage them. There are VERY specific and VERY strict regulations applying to regulated investment companies such as mutual funds and ETFs that make what happened with Madoff impossible. It simply doesn't happen and can't happen, at least not in the United States. Bribing auditors wouldn't work because there are too many independent agencies all verifying what every else is doing. All bets are off in Bulgaria.

2.) It's all electronic, but it's backed up a billion times and verified every single day.

3.) No. You have absolutely no control over the stocks a mutual fund invests in. You either buy or sell the fund itself.

4.) Yes, you can buy stocks individually without going through a mutual fund. It is not recommended.

[GreenGuava]

Never go with an "investment" that holds custodianship of their own assets (for those wondering, Vanguard funds' assets are held by JP Morgan and audited by PWC).

Could you explain what this means, please? It's another "technicality" I don't understand.

Sure.  When Madoff had his scheme going, if you invested with him, he wouldn't tell you what his investing strategy was or which assets he held - merely his return numbers and occasional statements.

So some people wonder - especially with high returns lately - if their Vanguard assets might be at risk in the same way.  Well, if you want to know which assets a particular Vanguard fund has, you can find that out.  But it isn't even Vanguard holding the stocks on your  behalf:  JP Morgan holds them, clearly marked as Vanguard's.  This isn't specific to Vanguard:  by law, every U.S. mutual fund (Vanguard and otherwise) must have their assets held in custody by a third party. 

Furthermore, Price Waterhouse Coopers, a major accounting firm, is in charge of periodic audits of JP Morgan to ensure that the funds actually hold the assets that they claim to hold.

[loxs]

It has never happened and the chances of it ever happening are vastly lower than winning the lottery 18 times in a row during a zombie apocalypse on the moon.

See, no disrespect to what you are saying, but I am a scientist, and when someone says something like that, they either hand up evidence, or it weakens their argument :).

In fact you have no statical data, and you can't calculate a chance. It has happened once, and once is not a good enough sample. There is a very cool thing called Black Swan Theory [1]. The Madoff situation is a Black Swan event. They have a very interesting characteristic. Before they happen, people say things like your statement for their chances of happening. But they do happen. And the question is not "if". The question is "when" and "how". We will not be expecting it. And we will not be prepared fully.

Probably the only defence against such events is diversification. And knowing what to do when such a thing happens. And no, we are not prepared. Because I think not many people know exactly the regulations and the loopholes of the whole system. Being a computer programmer, and having been defeated times and times over, when trying to "regulate" a big chaotic system, I can tell you that no... more regulation does not mean more safety. It means more edge cases, more exploits and more uncertainty.

But having said all this, still I'm willing to invest. Only because we have no other choice. Bank deposits are worse. Rental properties are worse. Gold is worse...

Well, it's an interesting wold. Better have more of it :)

[1] https://en.wikipedia.org/wiki/Black_swan_theory

[loxs]

Sure...

Thank you, now I am a bit less skeptic.

[GreenGuava]

Sure...

Thank you, now I am a bit less skeptic.

Glad to help.  Continue educating yourself so you can determine appropriate investment and savings vehicles for your future.

[loxs]

OK, so far my plan is to invest in one or two of the new Vanguard Ireland ETFs:

VANGUARD S&P 500 ETF, Symbol: VUSA, TER: 0.09%
VANGUARD FTSE Developed Europe UCITS ETF, Symbol: VEUR, TER: 0.15%

They are available online via Keytrade Bank Luxemburg. I guess they are "the broker" in this case. Could anyone hint me at what are their rights over my shares in the ETF? Are they again "their shares" and what happens if they go bust?

Also, does anyone know other European online brokers that offer these ETFs, so that I can compare terms?

[Freeyourchains2]

Very big companies like Disney and Coca-cola won't magically disappear overnight.

Look at the intrinsic value of the companies you wish to buy stock in, then buy as low as you can, when you believe the stock price is undervalued by 10-75% (like during a market crash). To eventually sell high.

Then look around and see what consumers are buying and listen to co-workers conversations on what they are spending their money on.

Like, "Is your family going to Disney World again this year?!"

Or, "I bring in this 2 liter to work every week."

Or, "I like "liking" everything on my Facebook feed."

Observe the antimustachians, seeing what foods they like to eat and what habbits they have. Then lure them into a $49.95 amusement park with no exit unless they spend another $49.95. Or simply just buy those company stocks after research and analysis.

[mr. T]

Loxs, forget about the FDIC limit (amount of money protected in case a US bank goes bankrupt), it does not apply to someone in Bulgaria investing through a Swiss broker.

OK, that seems fair enough.

But then, what would be the case for someone in Bulgaria, investing through a Luxemburg (EU) broker (Keytrade) into one of the new Vanguard ETFs like VUSA [1] which is technically an Irish (EU) company (is this correct?) traded at ERONEXT Amsterdam?

Also, could someone explain this situation to me, please? Who in the above situation has what rights, owns what and can do what kind of criminal things to my money?

[1] http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0000YXKB

The Vanguard fund owns the underlying shares.
You own the Vanguard fund.
The fund is registered in Ireland, so it's under Irish supervision. It's traded on the Amsterdam exchange, so everything that has to do with the exchange listing itself (reporting rules etc) are overseen by the Amsterdam exchange and the Dutch authorities.
The broker is under Luxemburg supervision. The account will be insured under Luxemburg regulation.

If your broker goes bankrupt, the shares in your account will still be yours. They stay outside of the bankrupcy. If Vanguard goes bankrupt, the underlying shares are still yours. Only a really bad case of bankruptcy fraud can touch you and even in that case you'll probably be reimbursed.

Also, there is a layer of EU regulation and supervision over the exchange, the broker and the fund manager.

There are many places where criminal activity might take place:
- The companies the Vanguard fund invests in, can be criminal (or some kind of scandal that's not exactly criminal will take place). Once in a while that will happen. Diversification is your best defence.
- Vanguard might be criminal. There have been criminal fund managers before. But Vanguard won't be. It's a big, respectable company. Too much is at stake.
- Your broker (Keytrade) might be criminal. Again, Keytrade is a big, respectable company. The chance of them turning criminal is vanishingly small.
- Someone might phish your account details, log in under your name and plunder the account. If you can convince the police and the broker that it's theft, you'll probably be reimbursed.

A custodian is a company that does the administration of share ownership. Back in the days when shares were paper certificates, the custodian had a vault where all the share certificates were laying. Nowadays, it's a purely administrative function. Custodians are highly regulated and financially insulated from the rest of the company they're part of. No need to worry about that.

[Undecided]

Very big companies like Disney and Coca-cola won't magically disappear overnight.

Or GM.

Pre-bankruptcy stock charts: http://www.netadvisor.org/tag/old-gm-stock-charts/#.UiDVSxZ430c

[beltim]

Very big companies like Disney and Coca-cola won't magically disappear overnight.

Or GM.

Pre-bankruptcy stock charts: http://www.netadvisor.org/tag/old-gm-stock-charts/#.UiDVSxZ430c

GM didn't disappear overnight.  It posted 4 consecutive years of multi-billion dollar losses (3 of the 4 years the losses exceeded $10 billion), and at the end of that you still had the chance to sell for almost half of the stock at its 2000 peak.

http://www.wikinvest.com/stock/General_Motors_(GM)/Data/Income_Statement#Income_Statement

Companies fail, yes.  But with the rare exception of fraud (Enron, Worldcom), large, hugely profitable companies don't disappear overnight.  Sometimes their business models fail and the company goes out of business, but there's almost always a chance to sell long before that happens.

[Undecided]

Very big companies like Disney and Coca-cola won't magically disappear overnight.

Or GM.

Pre-bankruptcy stock charts: http://www.netadvisor.org/tag/old-gm-stock-charts/#.UiDVSxZ430c

GM didn't disappear overnight.  It posted 4 consecutive years of multi-billion dollar losses (3 of the 4 years the losses exceeded $10 billion), and at the end of that you still had the chance to sell for almost half of the stock at its 2000 peak.

http://www.wikinvest.com/stock/General_Motors_(GM)/Data/Income_Statement#Income_Statement

Companies fail, yes.  But with the rare exception of fraud (Enron, Worldcom), large, hugely profitable companies don't disappear overnight.  Sometimes their business models fail and the company goes out of business, but there's almost always a chance to sell long before that happens.

Of course, but "hugely profitable" is a new qualifier, and people definitely bought shares of GM a year into that period, or two years into that period, because they were sure it was a dip, a buying opportunity in a 100 year old company that surely wasn't going to disappear "overnight." And in a literal sense, of course, it didn't, but what's a couple of years in the timeframe of a buy-and-hold investor? The bigger point is that it's not enough to know that a company won't literally disappear, because what matters is whether its stock will recover above the dip, not just stay above $0. So when structural changes that initially create widespread "buying opportunities" in fact kill off some of those opportunities.

[beltim]

Very big companies like Disney and Coca-cola won't magically disappear overnight.

Or GM.

Pre-bankruptcy stock charts: http://www.netadvisor.org/tag/old-gm-stock-charts/#.UiDVSxZ430c

GM didn't disappear overnight.  It posted 4 consecutive years of multi-billion dollar losses (3 of the 4 years the losses exceeded $10 billion), and at the end of that you still had the chance to sell for almost half of the stock at its 2000 peak.

http://www.wikinvest.com/stock/General_Motors_(GM)/Data/Income_Statement#Income_Statement

Companies fail, yes.  But with the rare exception of fraud (Enron, Worldcom), large, hugely profitable companies don't disappear overnight.  Sometimes their business models fail and the company goes out of business, but there's almost always a chance to sell long before that happens.

Of course, but "hugely profitable" is a new qualifier, and people definitely bought shares of GM a year into that period, or two years into that period, because they were sure it was a dip, a buying opportunity in a 100 year old company that surely wasn't going to disappear "overnight." And in a literal sense, of course, it didn't, but what's a couple of years in the timeframe of a buy-and-hold investor? The bigger point is that it's not enough to know that a company won't literally disappear, because what matters is whether its stock will recover above the dip, not just stay above $0. So when structural changes that initially create widespread "buying opportunities" in fact kill off some of those opportunities.

You're right, hugely profitable is a new qualifier.  I would argue that "profitable" is a necessary qualifier, which also wasn't in the original post.  From the examples given I would argue that "profitable" was implicit.

Anyway, what we're discussing might be irrelevant to the original poster.  Individual companies can go out of business, yes, which is why it's important to be diversified.  An index fund such as one of the two the original poster mentioned provides plenty of diversification for these purposes.  This diversification has meant that historically, the stock market has provided an excellent return on your money even after including results from companies that went out of business.

[Undecided]

Anyway, what we're discussing might be irrelevant to the original poster.  Individual companies can go out of business, yes, which is why it's important to be diversified.  An index fund such as one of the two the original poster mentioned provides plenty of diversification for these purposes.  This diversification has meant that historically, the stock market has provided an excellent return on your money even after including results from companies that went out of business.

True, but he'd asked and been encouraged about picking individual stocks, so some balance to that encouragement seems fair.

[kyleaaa]

In fact you have no statical data, and you can't calculate a chance. It has happened once, and once is not a good enough sample. There is a very cool thing called Black Swan Theory [1]. The Madoff situation is a Black Swan event. They have a very interesting characteristic. Before they happen, people say things like your statement for their chances of happening. But they do happen. And the question is not "if". The question is "when" and "how". We will not be expecting it. And we will not be prepared fully.

Probably the only defence against such events is diversification. And knowing what to do when such a thing happens. And no, we are not prepared. Because I think not many people know exactly the regulations and the loopholes of the whole system. Being a computer programmer, and having been defeated times and times over, when trying to "regulate" a big chaotic system, I can tell you that no... more regulation does not mean more safety. It means more edge cases, more exploits and more uncertainty.

But having said all this, still I'm willing to invest. Only because we have no other choice. Bank deposits are worse. Rental properties are worse. Gold is worse...

Well, it's an interesting wold. Better have more of it :)

[1] https://en.wikipedia.org/wiki/Black_swan_theory

No, it hasn't happened once. Madoff was not a regulated investment company as ALL mutual funds and ETFs are. Never has a regulated investment company ever "vanished." And even in the Madoff case, investors will end up getting most of their money back, it will just take a while.

I am very, very well-educated on Black Swan theory. It doesn't apply here in the way you are using it. The point is that EVEN IF an unimaginable Black Swan happens, if the absolute worst case scenario happens, you won't lose your money. Or at least, you wouldn't still be alive to care. This is because there are so many redundant safe-guards in place, no one or two or three or even 4000 collapses will cause you any harm. Madoff's fund has none of those safe-guards because it wasn't an investment company.

What if Vanguard collapses? You won't lose a dime. It's happened before. What if the custodian collapses? You won't lose a dime. It's happened before. What if the fund manager collapses? You won't lose a dime. It's happened before. What if somebody at the auditor commits fraud or the auditor itself collapses? You won't lose a dime. What if all three happen at the exact same time? You won't lose a dime, it just might take a while to get your money back. But that's never happened.

But remember, even Madoff victims will get the vast majority of their money back. So it's really not that bad.

[beltim]

Anyway, what we're discussing might be irrelevant to the original poster.  Individual companies can go out of business, yes, which is why it's important to be diversified.  An index fund such as one of the two the original poster mentioned provides plenty of diversification for these purposes.  This diversification has meant that historically, the stock market has provided an excellent return on your money even after including results from companies that went out of business.

True, but he'd asked and been encouraged about picking individual stocks, so some balance to that encouragement seems fair.

Fair.  Loxs: If investing in individual stocks, diversification is definitely necessary.  Most people agree 20-30 individual stocks are necessary for prudent diversification.

[Le Dérisoire]

Very big companies like Disney and Coca-cola won't magically disappear overnight.

Look at the intrinsic value of the companies you wish to buy stock in, then buy as low as you can, when you believe the stock price is undervalued by 10-75% (like during a market crash). To eventually sell high.

Then look around and see what consumers are buying and listen to co-workers conversations on what they are spending their money on.

Like, "Is your family going to Disney World again this year?!"

Or, "I bring in this 2 liter to work every week."

Or, "I like "liking" everything on my Facebook feed."

Observe the antimustachians, seeing what foods they like to eat and what habbits they have. Then lure them into a $49.95 amusement park with no exit unless they spend another $49.95. Or simply just buy those company stocks after research and analysis.

I'm sorry, but I totally disagree with freyourchains (again, sorry bro).

Never invest based on anecdotal evidence, such as what your coworkers like to spend their money on. The fact that your coworker likes to drink coke (or dress as a woman on the weekends, for that matter) does not tell you anything about the company profile, direction, debt, income, financial ratios... Statistics being what they are, you would have a better result by randomly picking a stock.

Also, 'looking at the intrinsic value of a company' is not as simple as it sounds. OP questions tell me that he's neither a CFA nor a finance PhD. Fundamental analysis requires a particular knowledge that the OP does not have (neither do I).

Finally, empirical evidences show that nobody can tell consistently if a stock is undervalued or overvalued, because the price of a stock is always the reflect of all the available information on the market (according to the efficient market hypothesis). If you see a stock going down by 10%, it doesn't mean it's undervalued. It means that other people on the market see a new risk with that stock that you don't yet see. Keep looking.

Don't try to time the market. Statistically, you'll lose. You cannot buy low, you cannot sell high. And if the market is sometime irrational, empirical evidences also show that it is not possible to consistently take advantage of this irrationality.

[loxs]

No, it hasn't happened once. Madoff was not a regulated investment company

I didn't know this. And yes, I know my response was a bit too harsh, and too paranoid. Thank you for your further explanations.

On the other hand, I read some seriously scary sh*t here:
http://the-international-investor.com/investment-faq/stock-broker-account-safety

As it seems, I am at the absolute mercy of my stock broker (Keytrade is still my favourite).

Under most systems, regardless of what name the stocks are in, your stock broker still has access to them to sell them – otherwise they wouldn’t be able to carry out your trades. So that means they could choose to sell them fraudulently without your instructions, just as they could in a nominee account.

I wonder if there is some online broker that allows me to sign each and every transaction with my electronic signature, instead of some flaky "secondary security code", as is in Keytrade's case. That would be great in order to ensure me some protection "from themselves", as they wouldn't be able to generate fake transaction requests "on my behalf".

[matchewed]

That's a bit paranoid as well. What incentive would they have to generate fake transactions on your behalf? Their entire credibility would be shot and no one would want to do business with a company like that.

Honestly investing is a complex system, at the end of the day you will have to interface with some company in order to invest in stocks. You just may have to get over your unfounded fears of things that generally don't happen. As the article you linked to recommended, use reputable stock brokers.

[loxs]

That's a bit paranoid as well. What incentive would they have to generate fake transactions on your behalf? Their entire credibility would be shot and no one would want to do business with a company like that.

Honestly investing is a complex system, at the end of the day you will have to interface with some company in order to invest in stocks. You just may have to get over your unfounded fears of things that generally don't happen. As the article you linked to recommended, use reputable stock brokers.

I guess Keytrade is reputable enough, so I will proceed regardless of my paranoid fears. But still, electronic signature of transaction requests is not too much to ask for. It is provided by every other (non investment) bank. At least here in Bulgaria. In fact that's the only way I order money transfers from my bank. Going one level down on security feels a bit awkward :)

[Freeyourchains2]

Don't try to time the market. Statistically, you'll lose. You cannot buy low, you cannot sell high. And if the market is sometime irrational, empirical evidences also show that it is not possible to consistently take advantage of this irrationality.

CEO's time the market all the time. They don't just react to it. Plus they take a risk, a big risk with other's people's money and jobs on the line.

But i guess they have more credibility to play with other people's lives then the common investor does. That's what empirical evidence shows.

[Undecided]

Don't try to time the market. Statistically, you'll lose. You cannot buy low, you cannot sell high. And if the market is sometime irrational, empirical evidences also show that it is not possible to consistently take advantage of this irrationality.

CEO's time the market all the time. They don't just react to it. Plus they take a risk, a big risk with other's people's money and jobs on the line.

But i guess they have more credibility to play with other people's lives then the common investor does. That's what empirical evidence shows.

CEOs assume very little risk for losing bets, but can experience huge upside for winning bets. If you followed trends in corporate governance developments, you would be aware that risk/reward as an impact on executive compensation has been a major activits' topic in recent years. Similarly, 2-and-20'fund managers have little immediate downside risk for losing bets with client money, but significant upside potential, so the individual investor isn't in their shoes, either.

[Freeyourchains2]

Don't try to time the market. Statistically, you'll lose. You cannot buy low, you cannot sell high. And if the market is sometime irrational, empirical evidences also show that it is not possible to consistently take advantage of this irrationality.

CEO's time the market all the time. They don't just react to it. Plus they take a risk, a big risk with other's people's money and jobs on the line.

But i guess they have more credibility to play with other people's lives then the common investor does. That's what empirical evidence shows.

CEOs assume very little risk for losing bets, but can experience huge upside for winning bets. If you followed trends in corporate governance developments, you would be aware that risk/reward as an impact on executive compensation has been a major activits' topic in recent years. Similarly, 2-and-20'fund managers have little immediate downside risk for losing bets with client money, but significant upside potential, so the individual investor isn't in their shoes, either.

Until a market crash shatters the pyramid of glass made by the CEOs and Fund managers. Then they fire ceos, fire professional employees, and the fund managers say tough luck to their investors who needed the money in "tough economic times" and sold for nearly nil.

[Undecided]

Don't try to time the market. Statistically, you'll lose. You cannot buy low, you cannot sell high. And if the market is sometime irrational, empirical evidences also show that it is not possible to consistently take advantage of this irrationality.

CEO's time the market all the time. They don't just react to it. Plus they take a risk, a big risk with other's people's money and jobs on the line.

But i guess they have more credibility to play with other people's lives then the common investor does. That's what empirical evidence shows.

CEOs assume very little risk for losing bets, but can experience huge upside for winning bets. If you followed trends in corporate governance developments, you would be aware that risk/reward as an impact on executive compensation has been a major activits' topic in recent years. Similarly, 2-and-20'fund managers have little immediate downside risk for losing bets with client money, but significant upside potential, so the individual investor isn't in their shoes, either.

Until a market crash shatters the pyramid of glass made by the CEOs and Fund managers. Then they fire ceos, fire professional employees, and the fund managers say tough luck to their investors who needed the money in "tough economic times" and sold for nearly nil.

That's entirely consistent with my point, not your earlier point. The worst-case scenario for the CEO is being dismissed, in almost all cases on a "not for cause" basis that allows him/her to realize whatever severance rights apply. The point is that it's more "worth it" for CEOs to take big bets with company plans, or fund managers to take big bets with client money, than it is for an individual trader to take big bets with personal funds.

[Le Dérisoire]

CEO's time the market all the time. They don't just react to it. Plus they take a risk, a big risk with other's people's money and jobs on the line.

I don't understand your point. Even if I assume that CEO do time the market, what does it tell me about their average ROI compared to someone that passively invest while taking the same amount of risk (by leveraging the whole market, for instance)?

And even if after a big study someone concluded that CEO do have a better ROI than the passive investors for the same amount of risk, it wouldn't necessarly mean that timing the market is a good thing. It could mean that CEO have access to insider information, among other things.

I would like to suggest you the book Investments by Zvi Bodie (I only read some parts of the canadian edition).
http://www.amazon.ca/Investments-Zvi-Bodie/dp/0073530700/ref=sr_1_6?s=books&ie=UTF8&qid=1378318609&sr=1-6