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The stock market can be a scary thing to talk about for some people. What are you trading if not small fractions of companies and speculations of how much that company is worth. Many people are simply not interested in the details of how our economic system works, yet must of us know that it plays a major role in our life.
Whether you invest in the stock market or not, it is true that it will end up affecting you in the future. This effect can only go two ways, you can go all your life having the stock market be irrelevant in your life and never have invested assets, therefore you won’t grow your money, or you can take advantage of the wonder this economic tool is.
If you have a 401(k), 403 (b), IRA or any other personal retirement account, then you have already taken part in the stock market. If you lack any of these then this is a perfect opportunity to learn how you can begin investing in order to secure your future. So here are the basic and easiest concepts of investing worth knowing. The products and prices mentioned here are based on Vanguard investment options and my personal portfolio broker system Folio Investing.
What is the stock market?
The stock market is the place where everyone brings their cash cows to try and sell them. This trading tradition dates back to the 1500s, and by 1817 the U.S. had its own stock exchange with the creation of the New York Stock Exchange (NYSE). Through the stock market, companies have a selling platform and regular working people like you and I can buy pieces of this company called stock. Instead of buying whole companies, now we can buy pieces or shares of the company. This allows us to share on some of the company gains, but also experience their losses.
The better the company performs, the better our returns on our share or the little piece of the company we decide to purchase. This mutual relationship between consumer and producer helps us both. Through the stock market, companies find ways to fund their enterprise and consumers like us can invest in those efforts if we see the worth.
There are variations of how you can buy stocks.
1.) Individual Stocks
Any legal American resident or citizen with some cash can purchase individual stocks. The risk in individual stocks is higher than keeping your money in a savings account, but it also yields a higher return. There are thousands of companies you can buy stock from, all it requires is a broker. Brokers are companies like eTrade, or Folio Investing, or Scottstrade. These brokers will charge you a fee for allowing you to buy and sell stock.
2.) ETF’s (Exchange-Traded Fund)
ETFs are funds that contain assets like stocks, currency, gold/silver, oil, and bonds. ETFs are exchanged like stocks but they contain more than just individual stocks. The risk is usually lower than individual stocks and the minimums to begin investing in one is lower than mutual funds, $3,000-$5,000. ETFs have someone who manages the fund, thus requiring less maintenance from your part.
3.) Mutual Funds
Mutual funds contain hundreds and thousands of stocks. You can think of mutual funds as a huge basket of many diverse and multiple stocks. The fact that there is more diversification makes it a less risky way to invest. The minimum to start a mutual fund are higher, around $10,000 and since it requires more attention from the fund manager, they have higher fees than ETFs.
There are load and no-load mutual funds. No-loads don’t charge front and back-end sales fees but do charge an annual percentage for operating expenses.
Return on investments
The interest you earn on your investment is a deep hole of what ifs and scenarios. I won’t go down that path, simply because no one can guarantee that you will always get a positive return on your investment. However, patterns throughout the years show that your money will make more money invested in the stock market than in a simple savings account.
When deciding how and on what to invest your money, do as much research as possible and go with the products that have proven to work and have a long-standing record. Trends and fads will only last until they are no longer trends and fads. Here are the top reads that have helped me figure out how it all works.
What I can guarantee you is that both of these books will clarify the most important things you need to know as an investor. Give them a read, I would love to hear what you think!
Playing the stock market game
No, I don’t mean playing the stock market game that your economics teacher made you play in high school. Personally, I think that’s the worst way to teach teenagers about investing and personal finance. What I mean by playing the game is the temptation to feel like you are a pro and begin selling and buying stock like a maniac.
I stay away from buying and selling stock simply because unless you are a professional broker and have the magic touch like Warren Buffett, you will fail terribly. However, If you want to indulge a bit, consider setting aside a very small percentage of your money. For me, that’s $500 that I use to invest in individual stocks in order to learn more about them. Needless to say, I have lost more than I have earned in interest so far, it’s all in an effort to experiment and blog about the experience.
There are many pitfalls when it comes to managing your money. One thing is true, however, the more educated and aware you are the more likely you are to avoid mistakes. Once all your debt is cleared, it is the time to begin investing in the future. Protect yourself with personal investments and do not count solely on social security and your employer’s pension or retirement plan.
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