When getting started with investing in the stock market, it’s critical that you do a little research in advance so that you don’t lose your pants as a young investor.
After much discussion about what to do after in college in terms of career options, it’s important that I go over options for your money. You come here because you want to know what to do with your hard earned money. You’re looking for solutions to basic and complex financial problems. My goal is to help you make more money and keep more of it in your pocket.
To make more money, many young people are going to want to get involved in the stock market. I’m here to go over some common questions about the stock market for beginners.
I realize that understanding the stock market will sound scary at first. After a little bit of research and practise, you won’t be confused about the stock market at all. Granted, you’ll still be upset when your shares go down in value, but you’ll know what’s happening.
We’re going to go over some stock market basics to help you understand what’s going on.
Why do some people get rich off the stock market?
You can make money off the stock market by taking lots of risks and having luck on your side. However, the reality is that stories of new investors getting “rich” off the stock market are usually greatly exaggerated. It’s really easy to get all excited about the stock market because of these get rich quick stories. The stock market is sort of like blogging in this sense. New investors want to get in because they hear stories of easy ways to make big money. They sign up with an online stock broker and think that everything is going to work out.
The truth is that you can make money from the stock market if you buy stock in a company that happens to be undervalued. Over time the company will make some big moves that will equate to the price of the share going up. If you own a decent amount of shares and the price per share goes up high enough, you can sell your shares and enjoy your profit.
Let’s put some numbers behind this so you see where the money is made from investing in the stock marketing.
Let’s say that Studenomics goes public one day. After about a month or so the price of a share is $2. You decide to grab 1,000 shares. For the sake of brevity, we’ll assume that no stock splits or any major incidents happen during this time. Now let’s assume that the company is bought by a colossal corporation. This news drives the stock price up to $10. What does means is that you went from having $2,000 in shares ($2 x 1,000) up to $10,000 in shares ($10 x 1,000).
In this simplified example, you made yourself $8,000 before taxes just because the stock price went up. You can imagine how you can get rich from investing in the stock market if you have more money to play with or if the stock price soared up even higher.
Can young investors lose a lot of money on the stock market?
As much as the value of the stock that you buy can go up, it can go down as well. When you learn how the stock market works, you’re going to realize that you can actually lose a decent chunk of change. The value of a share can drop dozens of dollars in a day just with the release of bad news. You can lose half of your money before you even get home from work. Even major economic issues that don’t affect the companies that you own shares in can drive the value down.
Why risk your money with investing in the stock market?
The reason that young investors want to even take the risk of losing money is because they want to make money on their money. New investors will quickly find out that there’s only so much money you can generate from interest even if you find the best online banking account. This is why many of us will turn to the stock market to make money with our money.
Anything else you need to know about the stock market?
Do you want to know how does the stock market work? This was another post on here that led to a thought-provoking discussion about stocks. I wanted to share some of the insights here for those of you that are looking for more stock market basics.
Laura wrote in about understanding the stock market:
Your advice is sound. I would add one more suggestion. If you’re interested in a particular stock and know something about the company and the industry in which it operates, before you buy, follow the stock for a time and try to learn about the market volatility (cycles and spikes) that are typical in that industry. There’s lots of good information available for free or at low cost online (in the old days people relied on stock brokers for this type of info). The more you understand before you invest, the better you’ll feel about your investment, no matter how it turns out.
Edward on index funds:
An index fund is going to be the easiest, but not necessarily the safest investment. Even if the stock market as a whole goes down on a particular day, some stocks will go up. I personally like mutual funds. Even when everything went down a couple months ago after the U.S got it’s credit downgraded, one of the funds in my IRA still gained money.
If you have any more questions about the stock market then please leave a comment below. With stock market basics out of the way, we plan on going into more detail on understanding the stock market coming up next week.