5 minute read
STOCKS: SMART OR SEXY?
Stocks: Stocks: Stocks: Smart Smart Smart sexy? sexy? sexy? or or or
The Reddit/GameStop fiasco made you want to by stocks? You're not alone! | Story and graphic by Clorissa Morgan.
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Reddit?GameStop? GameStock?WHAT?
On the subreddit, r/wallstreetbets, an idea was born. The idea was that if enough people got together and managed to collectively buy the right amount of one stock, they could cause the cost of that stock to skyrocket. Instead of leaving the idea at just that, these people worked together. They bought a bunch of shares in GameStop--a dying company. Incredibly enough, the plan worked, and the people essentially took control of the stock market. The price of the GameStop stock soared, and these people made incredible profits. The controversy surrounding this event, as well as the amount of money these people made, led to an increased interest in the stock market across the nation. If the Reddit/GameStop fiasco made you want to look into the stock market, you’re not alone. We’re here to help you break it down!
How do I get Started?
First, you have to understand the components of the stock market. The stock market is composed of stocks and shares. In the simplest terms, shares are a small unit of a company’s stock that you can buy. When you invest in a specific business through the stock market, like Spotify, for example, you are buying a share of that business. Stocks, on the other hand, are the representation of a business. All the shares together make up the stock. When it comes time to actually invest in the stock market, it's also important to understand that supply and demand heavily influence the price of shares. Supply and demand cause the cost of a stock to rise and fall. When a company is expected to perform pretty poorly, people generally sell their shares because they don’t want to lose money. It’s the same when a company is expected to do well: people buy shares at a low price that they sell later at a higher price to make money. Several factors like the news and annual reports on the company can influence the company’s expected performance. So, it’s finally time for you to invest in stocks! You’ve signed up with a company like Robinhood and you’re ready! But, before you buy your first share, ask yourself a question.
Do you want to be a sexy investor or a smart investor?
A sexy investor is your typical Wall Street gambler. This is someone who invests in their favorite companies like Disney, Starbucks, or Spotify. Buying shares at a low price and selling them at a higher price is the name of the game. Sexy investing is a gamble; as the saying goes, when it comes to gambling, the house always wins. When it comes to making money, it’s pretty
obvious that you would rather be smart than sexy. After all, if the sexy investor just gambles, wouldn’t you rather go to a casino instead? This is where the smart investor comes in. A smart investor looks at a company to invest in for a minimum of five years. This person doesn't look at promises or their favorite companies. They don’t constantly worry over the day-to-day rise and fall of the prices of stocks. Instead, the smart investor looks at something called an Exchange-Traded Fund (ETF).
Wait… What’s an ETF?
ETFs are basically a way to buy shares of different stocks all at once. Think of it as a gift basket of candy. The gift basket stays within the category of candy, but there are different brands and types of candy for you to eat. In the same way, ETFs let you pick a category (like technology) and buy different shares within that category in one lovely little basket. When investing in ETFs, it helps to think of it as if you were betting at a horse race. If you put all your money into one horse and that horse loses, you’ve lost all of that money. However, if you spread the money out and bet on all the horses, one of your bets is guaranteed to win. By diversifying the bets you make, you are guaranteed a return and increase on your money. It’s essentially the same idea with the stock market. Just like horses, some stocks are going to succeed more than others. By diversifying the stocks you invest in, you will also diversify the risk you are taking. ETFs allow you to pick a category that you think will grow well over time and gain returns on that category.
Okay! You’ve picked out an ETF that you want to put money into. You’re ready now, right?
Well, the answer is not quite. The last key to understand the path of the smart investor is time. Time is tricky in the stock market. If a stock’s price is constantly fluctuating, when is the best time to invest in an ETF? Should you wait until you think the price is as low as possible? Probably not! You don’t have a way to know exactly what it will be and how it will change unless you have a time machine. Trying to guess is incredibly stressful. What if you buy too high? If you instead buy into your ETF at small amounts over time (once or twice a month), you end up buying in at an average price. Though there will be times when the price may be higher than usual, there will also be times where it’s lower than usual so that it averages out.
But if I’m buying at an average price, how will I make money?
This is the beauty of compounding interest. Compounding interest is like gaining interest upon interest upon interest. The smart investors (who invest in an ETF over a minimum of five years) let their money sit, compounding interest causes the price value of a stock to increase more and more as the years progress.
