Introduction to Investing

Fun Fact:

The value of all stocks worldwide is 70 trillion dollars - that's more than 3x the size of the US economy!

            So you want to make money, huh? You’ve come to the right place. Investing, when done with patience, diligence, and attentiveness, is a good way to do just that. But the stock market is gigantic, as are other investment markets like those for bonds, mutual funds, real estate, and cryptocurrency. That’s why I’m here - to make sure you get off to a great start!

           Believe it or not, one of the most important things to keep in mind while investing is goal-setting. Think about some of your goals. You’ve probably got a few that come straight to mind - are they short-term or long-term? Some goals, like “I’m going to get a snack after watching this episode of Arrested Development” are obviously short-term and often involve more concrete steps, while others, like “when I get rich from reading this article on investing and following its advice for the next few decades, I’m going to buy a mansion” are more long-term, whose steps are likely to be more general. Long-term purchases tend to be bigger, which is why they will involve the usage of savings accounts and investments. 

Fun Fact:

The richest investor in the world is Warren Buffet, with a net worth of $72 billion!

           If you’ve ever heard the story of the tortoise and the hare, savings accounts are like the former. They’re sure to make you some money in the long term, but you aren’t likely to strike rich. Investing in stocks gives you a chance at that, but it also gives you a chance at losing money that a savings account just doesn’t. That chance is called risk, and people get paid a lot of money to research the risk involved in certain stocks.

           So what does buying stock actually mean? It means that you are purchasing a portion, or share, of ownership of that company (think of a pie with millions of absolutely tiny pieces). Share prices depend on a lot of things, including how the company did in the past, how it’s doing now, natural disasters, and public perception of the company. Generally, if people think the stock will increase in price later, they will buy it now (so they can sell it later for that higher price). But, if they are wrong and the company does not perform as well as they thought, the risk involved means the investor  will lose money. Some stocks pay a dividend, which is a small amount of money - way less than the price of a share, but it’s something - paid to all of its owners. Another way to make money from stocks is capital gains, which we’ll go over in a later article.

           When people say “the market is doing well today,” what are they saying? They’re not talking about any individual stocks, but rather a whole collection of them. There are several versions of these collections, called indexes, but the two most popular ones are the Dow Jones Index and the S&P 500. The former is made up of just 30 large companies (which is why some say it’s not the best indicator of how most stocks are doing), while the latter is made up of about 500 companies of a range of sizes and industries. The diversity means that, if the S&P 500 is doing well, chances are that most individual stocks are too.

Fun Fact:

During the Great Depression in the early 30s, the stock market crashed by over 60%.

           This is a lot to throw at you, and it’s a lot for many investors to digest, too. Luckily, if you don’t have the time to do time-consuming research and find the best stocks, you can invest in a mutual fund - a company that itself invests in a diverse array of stocks. The idea here is that you and a heck of a lot of other people buy shares in a mutual fund, but instead of getting ownership in the company, you get part of the ownership of that collection of stocks that the managers of the mutual fund invest in with your money. That means that, even with something like $15, you can be an owner of a small piece of Apple, Boeing, Twitter, Ford, and more. The great thing about these is that they spread risk - say there’s a pandemic and airline prices drop because nobody is flying anymore. If you’ve only invested your money in airlines, say goodbye to that future mansion. But if you’ve been a smart investor spreading your risk through a mutual fund into multiple industries...well, that mansion might not be such a long-term goal, after all.

           Five topics to explore if you found this article easy: value investing, asset pricing, p/e ratios, short-selling, bonds.

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Sources:

Curriculum - Wells Fargo Bank. "Introduction to Investing." Hands on Banking Instructor Guide, 2013.