Making Cents – Investing: A brief intro on the stock market
Mathew Carrick / Columnist
When people start using the word “investing,” a few things usually pop into mind: ultra-wealthy people, risk, stocks and financial black magic. Investing is often seen as a risky, gambling-like scheme equivalent to lighting money on fire or, on the other end of the spectrum, a way for people like Warren Buffet to become extraordinarily wealthy overnight. In truth, investing—growing an amount of money into more money by some process—is usually somewhere in the middle as a gradual way to build wealth. Of course, rare exceptions do exist, but most thoughtful investors see moderate, consistent growth leading to a sizable gain after several years. In this article, I’ll focus on explaining the stock market and how college students can take advantage of it.
First though, I want to talk about a major way people do lose money through investing: “get rich quick” schemes. If you try learning about investing online, you’ll quickly run into ads that tell how some lucky soul was able to go from being in debt to being a millionaire in about a week. No legitimate investing advice involves getting rich overnight. Successful investing will take years to yield a real gain. If your source says otherwise, it’s best to move on—the advice will be risky or even an outright scam.
That said, investing in stocks is a good way to reliably build wealth over a long time period. A stock, or share, is a piece of a company offered on an exchange, or market, at a certain price. By buying stocks, individuals are actually purchasing a tiny part of a company. If I buy a share of Acme Inc. stock, then I become a (very small) part owner of Acme Inc. My investment will grow if people think that Acme Inc. is doing well, because other people will try to buy stock and will raise its price (this is where supply and demand from ECON 100 come in) — and I can then sell my stock at this higher price to make a profit.
Many stocks also pay dividends, a small amount given to each owner (called a shareholder) for each share. For example, if I own 100 shares of Acme Inc. and the company pays a dividend of $1 per year, then I will receive an additional $100 every year regardless of stock price.
Unfortunately, sometimes stocks don’t gain money. Companies lose business or even dissolve, economies have recessions, and sometimes the stock market crashes. In these cases, holdings in the stock market will lose value as many people sell and share prices sink. However, it’s important to keep steady and resist the urge to sell during a low time. Barring major catastrophe, the market will go back up and your investment will regain its value and likely grow more.
Of course, this doesn’t relieve you of all responsibility: you do need to keep track of your investments and make sure they still promise to be profitable in future years. Although investing in the stock market is a good way to grow wealth, it is somewhat risky. In fact, as a rule, don’t invest money you may need shortly as it may take a while for your stocks to grow. To offset risk it’s a good idea to diversify, or invest in multiple things. In other words, don’t put all your eggs in one basket. Don’t invest solely in one company or even in one industry: branch out.
One popular way to do so is through index funds. An index fund isn’t really a stock in the sense of a company, but is essentially a way to own a piece of a group investment. Suppose there’s an index fund A with many investors. Investor money is pooled together and invested into stocks by an administrator, with the intention of capturing a large section of the market. This way, if one company does badly or even fails, the overall group is not hurt very much.
Index funds are an easy way for small investors (which most college students are) to own shares in many different companies. If you choose this route, though, make sure to read the fine print—in exchange for administering the fund, a small percentage of the earnings will be taken out before being passed on to you. Some funds have higher fees than others, so make sure to pick one that’s low!
So, let’s suppose you want to get started investing. You don’t need much to get started—just one or two hundred dollars. Sometimes you can buy stock directly in a company, though this will vary on a company-by-company basis (try Googling “direct stock purchase plans”). It’s often cheaper and easier to do so, but direct investment comes with the disadvantage of being slow and is potentially more difficult to diversify with. A very common way to invest is to use a brokerage, or a service that allows users to purchase stocks, funds and other items. Many “discount” online brokerages exist, such as Scottrade, Vanguard, TD Ameritrade and others. Signing up for these brokerages is typically easy, though some may only offer services to users with a certain amount of money to invest.
Brokerages charge fees for directly buying stocks, but may allow users to trade freely with certain funds. Joining a brokerage will also give you access to analysis tools and information that make it easier to learn about potential investments. I recommend shopping around and researching brokerages to find the one that best suits you. There are a lot to choose from! I also caution people away from active brokers that you may find in brick-and-mortar stores. These brokers usually charge high fees and are simply not worth the cost for small investors. There are plenty of options when it comes to brokerages—don’t settle for a high-cost one!
In the end, I strongly recommend that most people seriously consider investing as a way to plan for the future and build retirement savings. Contrary to popular belief, investing in the stock market is not gambling. While the market has ups and downs, over a longer timespan of several years it will almost certainly yield a gain—and as I explained in my last column, this growth can lead to incredible results! Thoughtful, careful investing is a great way to help grow money, and with the rise of online brokerages it’s easier than ever before for individual investors to get started. Take a few months to set aside a small starting fund and give it a try! Read some financial news online, look for industries and companies that are doing well and have good future prospects, and learn about how investors become successful. It’s an amazing opportunity.