The Stock Market!
According to Investopedia, the stock market:
“… refers to the collection of markets and exchanges where the issuing and trading of equities (stocks of publicly held companies), bonds and other sorts of securities takes place, either through formal exchanges or over-the-counter markets.”
If you’re anything like I was when I first started out with investing, you read that and you now look like that emoji with the shrugging shoulders. Or the one that has it’s head smashed into it’s hands. Either way, you’re confused. Don’t worry, I’m confused.
To put it simply, the stock market is where you can buy and sell your stocks and bonds.
When you purchase individual stock in a company through the stock market, you essentially become one of the owners (usually along with the other billions of people investing) of the company. WIth the click of your mouse, and the movement of some funds, you’ve become a shareholder (or stockholder) of that company! Wow! Amazing!
Investors buy individual stock because they believe that the stock price will grow, meaning that they can make a profit when they decide to sell it. Theres the potential to make huge gains and sometimes even a 100% return.
With individual stock, you also have the ability to earn income if the company chooses to pay dividends (where they share profits with investors). Not all companies choose to do this, but some (this is something you can google) pay out hearty dividends each quarter!
But with these stocks, you also have the potential to lose money. You can find yourself in a situation where the stock price doesn’t increase, it lowers, and you end up selling it for less then you bought it for. That’s just the risk you take. And sometimes, it’s a bummer!
So say you want to invest but you don’t want to pick just one company. You’re greedy and you want a bundle of them (That was a joke)! If this be the case, you can choose to invest in a fund. A fund is kinda like a little boat. It pools in money from many, many investors (you) and purchases various individual stock from several companies. It allows investors to gain exposure whilst managing risk. Your not putting all your eggs in one basket to say the least. Your throwing them into this boat, like everyone else investing in that fund, and your hoping the captain makes the right decisions. (Note, this metaphor is probably inaccurate for all types of funds. But it’ll make sense shortly, so I digress).
And to make things just a little more complicated, funds are divided into two categories: Active and Passive.
An Active Fund is manages by a fund manager (this is the captain). A fund manager buys stock in several companies that they believe will perform better than the other companies. When you buy an active fund, you’l probably pay a fee of 1% or more (the captain needs their cut).
A Passive Fund doesn’t have a fund manager (auto piloted boat?). Instead, a passive fund usually tracks an index (an index is a statistical measure of a segment of the stock market, like the well known S&P 500! Which is like an array of 500 companies that give an indication of the strength of the US’ equities. Thats a lot. Simplistic of simplest terms, which someone’s gonna bitch and say it’s wrong, It’s like the average best companies out there *insert shrugging emoji*). A passive fund invests in the same companies that make up an index with the aim of achieving the same returns as that index. Usually theres low fees with passive funds (because well, auto pilot).
Exchange Traded Funds (ETFs)
Oh my, theres more!
An exchange traded fund is similar to an index fund in that they usually invest in companies in an index. The difference, they’re traded on the stock exchange, like stocks. *Insert screaming face emoji*
What’s attractive about ETFs are that they are priced continuously throughout the day, which enables investors to profit from short-term movements. Theres also the added benefit of being able to access less traditional markets, like Brazil and Eastern Europe.
Other then this difference. They act just like the boat, on auto-pilot.
The Meat + Potatoes
People invest money in stocks and funds to gain from the companies growth and/or earn income. For that purpose, many funds and shares allow you to pick between achieving said growth (growing your initial chunk of monies) and earning (receiving dividends on your investment).
If you’re starting out, and want to grow your capital (for retirement or a new car or college, etc) it would make sense to invest in funds that aim at growth. My personal recommendation is to purchase a bunch of low fee Passive funds and let that money marinate. Throw more in there, if you have it, and let it stew (oh, too many food references, I apologize). Point being, compound interest is a real thing, and if you find a good Passive fund with a decent average return (returns like the rate it grows), you’ll cash it out in 20 years with 10x as much as you put in it (maybe even more)!
Also, if you change your mind down the road, you can always sell some of your shares and create some income. Or sell them and purchase dividend-paying shares or funds! You can also, reinvest those dividends into new shares or funds and grow your pot instead of taking the income! There are so many possibilities here, and this is just the beginning!
Ta-ta for now!
For those interested in learning a bit more; I published a course called ‘The Simple Steps to Financial Freedom’ on skillshare (which you can get FOR FREE for a month, cancel whenever you want) if you want to learn about getting yourself in the position to invest!