Welcome to investing in stocks 101! In this post we will cover the basics of investing, some common investing terms you should know, some examples, and where to start!
Investing in Stocks 101
If you’re reading this post I’m guessing you recently were watching or reading something about investing, and now you want to know more. I’m glad someone piqued your interest, because what I’m about to tell you about is something that could change your life!
Investing is the #1 tool you have to accumulate wealth. If you choose not to invest, you probably will never be that wealthy, unless you win the lottery or something along those lines. That’s why today we need to talk about investing so you can start accumulating wealth today!
What is Investing? – Investing in Stocks 101
Before we dive too deep into stocks, we should talk about what investing actually is. The dictionary definition of investing is “to allocate money in the expectation of some benefit in the future”. So you’re putting in money NOW with the hopes of getting more money back LATER.
Most of the time, you’re actually betting against everyone else. When you choose to invest, you believe that either the company is undervalued, or the company will go up in value in the future. When you decide to sell your investments, you are saying that the company is overvalued or that the company will go down in value in the future.
Let’s say that somehow a company was able to guarantee (not possible) that they would go up in value. Then everyone would invest in that company because they knew for certain that they would get more money out of it. But, since a company can’t guarantee it’s success, not everyone will invest in it. So, when you choose to invest, you’re betting against everyone else and saying that you believe that a company will go up in value.
Is Investing Gambling?
So in a way, it is kind of like gambling if you don’t know what you’re doing. But, if you’re smart about your investments, it shouldn’t be like gambling at all. When gambling, you might win some money, but most of the time you’ll lose. When you’re investing, you might lose some money, but most of the time you’ll earn more.
This works because of the risk of investing is far less than the risk of gambling. As the saying goes, “High risk, high reward”. You could walk into a casino and triple your money in one night. With investing, it will take several years, if not decades to triple your money. Although it will take longer, investing is a lot less risky, which means that it is a much more reliable and safe way to increase your wealth.
The key to reducing risk is diversification. If you’re invested into one company, and that one company goes bankrupt, you lose all of your money. That right there is gambling. But, if you’re invested into 100 companies and 5 go bankrupt, it’s not the end of the world. That’s why a lot of people invest in mutual funds. Mutual funds are funds that you can put money into where your money is automatically diversified across several different companies.
Overtime, investing in mutual funds is very safe. It works because throughout history, the stock market has gone up (on average 10% per year not counting inflation). This is because our country and the entire world have become more developed, and therefore, our economy has grown a ton!
Just because the markets historically go up, doesn’t mean that they go up all the time. In fact, the stock market has a lot of bad days, weeks, months, and years! This is all part of the market’s natural cycle of going up and down, over and over again. For example, if you put in $1,000 into the stock market on February 20th of this year, you would only have $667 a month later on March 23rd due to the coronavirus scare. However, if you put $1,000 in the market on March 23rd, you would have $1,400 as of July 3rd. That might make it seem like gambling, but that’s why you don’t invest for the short-term. Because if you invested your $1,000 back in 1980, you would have over $25,000 today!
3 Rules of Investing
These 3 rules that I have outlined are the three main rules that you need to follow to invest successfully.
- Start today. If you are a teen reading this, you are in a great position to invest because you have decades of compound interest (when your interest earns more interest) ahead of you! That’s why it’s imperative that you start today.
- Stay consistent. After you start today, you should invest a little more each month, for the rest of your life! The market has it’s natural cycles, but you should invest regardless. Overtime, your money will go up.
- Diversify your investments. When you go to make an investment, make sure that you diversify across either several different companies, or into a mutual fund that will do it for you. This way you don’t lose all of your money if one company goes bankrupt.
What Is A Stock? – Investing in Stocks 101
Now that we have covered the basics of investing, we should talk about what a stock actually is. A stock is a share of ownership in a company. If you buy a stock, you own a small fraction of that company. It sounds cool, but you really don’t own that much of the company.
Amazon has roughly 500 million shares. So if you somehow manage to buy a share for $2,000+, you will own 1/500,000,000 of the company.
But, once you have a share and that company’s value goes from $1 trillion to $2 trillion (for example), you should in theory get 1/500,000,000 of that new $1 trillion which would be another $2,000.
I know that is kind of complicated, but just know that when you buy a share, you are buying a portion of that company, and when the company’s value goes up, so does your share price.
Investing Terms – Investing in Stocks 101
We should also define a few other investing terms that people need to know. This isn’t every term you will need to know, but this should be enough for you to have a basic understanding of investing and be able to know what other people are talking about.
Investing – Allocate money in the expectation of some benefit in the future
Stock – Divided into shares
Share – Partial ownership of a company
Return on Investment (ROI) – The yield an investment has generated
Interest – Payment earned from lending money
Compound Interest – When your interest earns more interest
Dividend – When a company takes a portion of it’s profits and redistributes them back to shareholders
Mutual Fund/Index Fund/ETF – Funds that are used to diversify people’s money across a wide variety of companies
Asset Allocation – Percentage of how your investments are spread out
Portfolio – The stocks that make up your total investment
Bonds – Issuing a loan to someone and being paid back with interest
Bear Market – When the market drops 20% or more from recent highs
Bull Market – When the market rises 20% or more from recent lows
Depression – Prolonged period of an unstable economy
Recession – When the market falls and corrects itself
Blue Chip – Large companies that have a great reputation and are very reliable
Capital – Financial assets
Dollar Cost Averaging – Investing consistently and averaging your investment cost by investing over a period of time
Inflation – The rate at which money loses it’s values, and thus prices rise
Liquidity – The ability to have assets quickly be turned into cash
Sector – Categories that companies fit in depending on their industry
Investing Where To Start – Investing in Stocks 101
If you’re wondering where to start with investing, you are kind of limited if you are under the age of 18. For any 18 year olds out there, you’re in luck! You can invest in any brokerage that you want!
I would recommend WeBull for the 18+ people out there. The platform is super easy to use and is absolute free (no commissions or fees!) If you sign up with this link to sign up you’ll receive a free stock valued between $10-$250!
For those under the age of 18, you are in a slightly more difficult situation when it comes to investing. Most brokerages require you to be 18 to open an account.
However, you can have a parent or other family member help you setup an account by either opening an account for you in their name, or opening a custodian account with your name on it.
One solution is an app called Bloom that lets teens open custodial accounts with their parents at the age of 13+.
What I would recommend is to find a family member (preferably your parents) who is financially literate and who invests. If you find someone who values the importance of investing, they will be much more likely to help you. Ask them what brokerage they use and then do research to see if that brokerage has custodian account options. If they do, ask that family member to help setup an account for you so you can start investing!
You could look at setting up a Vanguard Roth IRA for Teenagers!
I had my dad help setup a custodian account on eTrade because it was the platform that he uses. I hooked my bank account up to my account so that I could contribute money directly to my account. The best part is that my dad gave me access to the account so I can make trades as I wish!
Once you have an account setup, it’s time to research your investment options. For my first major investment, I chose SWPPX, which is a mutual fund for the S&P 500. I think that investing in a mutual fund when you first start investing is a great choice.
If you’re interested in investing in individual stocks, these are the 10 best long term stocks to buy right now in 2020!
Once you open your account and research what you are going to invest in, it’s time to contribute money to your account. I’d recommend hooking up your bank account to your investment account so you get easy access between the two. I’d start with a decent chunk of money, say 10-20% of your current savings. Invest that into a mutual fund to start. Then each month, invest another 10-20% of your income into this account.
If you’re looking for more info on how to start investing, check out this quick start guide!
Investing Examples – Investing in Stocks 101
What I would like to do next is go over some investing examples to demonstrate the power of investing. I will use 3 different people who each begin investing at a different age and each invest different amounts. Each person will invest 20% of their income into a mutual fund that generates 7% annually adjusted for inflation.
I used this investment calculator to make these estimates.
John – 18 years old, Income = $30,000/yr, Investment = $6,000/yr
John is fresh out of high school and just landed a job making $30,000/yr. He will invest $6,000/yr which is 20% of his income. By the time he is 65 he will have $1,975,346!
Jane – 24 years old, Income = $40,000/yr, Investment = $8,000/yr
Jane graduate college and got a job shortly after. A few years after paying off some debt she started investing at age 24. Now she invests $8,000 per year which is 20% of her income. At age 65 she will have $1,716,876 which is good, yet less than John.
Bob – 30 years old, Income = $50,000/yr, Investment = $10,000/yr
Bob waited to invest until he was 30. He does have a better pay at $50,000 which allows him to invest $10,000. Although he is investing more, at age 65 he will only have $1,382,368, which is less than Jane!
Here is another article on how to plan retirement for more information about this topic!
Hopefully you see from these examples that the key to making money from your investments is starting early! Time is the biggest factor in your investments, so the more time that you keep your money in, the more money you will make.
The point is that you should start today! Even if you make very little income, your money can make a lot more money if you are young! The younger you are when you start investing, the greater your advantage is over everyone else.
If you’re looking for other examples, check out this story of a teen day trader making thousands of dollars every minute!
Investing For Kids – Investing in Stocks 101
That being said, we should talk about investing for kids. If you are a kid (less than 13yo) reading this article, I’m impressed! There are very few kids interested in this kind of thing and you have a massive advantage over everyone! You really should open up a custodian account and start investing!
If you’re an adult reading this and you want to know about investing for kids, I would say the best thing that you could do is invest in a college 529 plan. College is the largest expense that kids will have before they have a good job to pay for things. Therefore, the best way for you to help out your kids to invest in a college savings account for them.
I’m super grateful that my parents have investing in a 529 plan for me. It’s going to save me a lot of money and stress when it comes time for me to head off to college next year.
Teen Investing – Investing in Stocks 101
Now if you are between the ages of 13-19, which I assume the majority of readers are, you still have a massive advantage over others. Most people don’t start investing until their 20’s, 30’s, or even later! Use your age to your advantage and start investing today!
As a teen, I don’t think you should invest more than 10-20% of your income. There are a lot of things that you need to save for in the short term, like a car and college. Since these are short-term items, don’t rely on your investments to be able to purchase these things. Keep the majority of your money in savings account for these items.
FAQ
What Is Investing?
Investing involves allocating money to something in the expectation of some benefit in the future. It’s like you’re betting against everyone else and saying that you believe this company is undervalued/overvalued.
Is Investing Gambling?
No, if you are wise about it investing should not be like gambling at all. The key to making it less like gambling is reducing risk.
Where To Start Investing?
Open up a custodian brokerage account with whatever platform your parents or family members use. Start by investing 10-20% of your savings and continue to invest 10-20% of your income each month.
The Takeaway
That’s it, investing in stocks 101! Hopefully you now know everything you need to start making money from investing! Remember that the 3 keys to investing are starting today, staying consistent, and diversifying your investments! If you can follow those 3 rules, you’ll be rich in no time!
