Why Are You Not Invested in the Stock Market?
The stock market can be described with a wide range of adjectives; lucrative and remunerative, risky and volatile, and to many just down right confusing. Flipping through the financial pages of the newspaper may look like the Matrix in print format. Many probably click on the stocks app on their iPhone and wonder what all those numbers, decimals, arrows and graphs are really all about. What in the world is a NASDAQ and who is this Dow Jones guy I keep hearing about? What are those Wall Street stock brokers, in their sweet suits, waving, signalling and yelling about all the time! If you’re this wondering person, you’re not alone. According to CNN Money over half of Americans have no investment whatsoever in the stock market. So what exactly are they missing out on?
The adversarial system of trading known as the stock market is undoubtedly complex, but understanding the basics is enough to get a grasp on how the wheels turn, and even how to invest wisely for your future. The stock market is a system where equities or “shares” of publicly-traded companies are issued, bought and sold. This action takes place on a stock exchange, a great example being the New York Stock Exchange on Wall Street. A share is a unit of ownership of a company, and multiple shares make up a stock. This means equity, and if you’re invested in a company by owning shares, you’re a shareholder and you have equity ownership in that company without even having to clock in! Your ownership shares are represented in the form of a stock certificate. As you can imagine the value of a company can increase or decrease, which means your stock value increases and decreases along with it. As a shareholder you’re also entitled to your share of the company’s earnings, and you’re not personally liable if the company fails or cannot pay its debts. Even though you’re a part owner, no one will come after you, and the most you can ever lose in that company is the value of your stock.
You may have heard the term “IPO” and wondered how that works. Companies can be private or public, and there are many benefits to both. At some point nearly every company has the need to raise capital to grow and expand. A company may be able to borrow privately with terms and conditions and the expectation to pay back those loans over a specific amount of time with interest, or in some circumstances a company can decide to sell part of the company to the public in the form of shares. When a company decides to go public they’re heavily vetted inside and out, and the value of the company is determined, as is the share price. That company lists their shares for sale on a stock market index. The initial listing and sale of the company stock is known as the Initial Public Offering or IPO. This is your opportunity to become one of its newest owners! You’ve heard of S&P, NASDAQ and NYSE, these are just a few of the many different indices where stocks are traded. This is how you’ll monitor the performance of your stock value as well as gauge the health and vitality of the overall economy.
Stocks are a part, if not the anchor of nearly every investment portfolio. But before you plunge into stocks, you must have a healthy baseline where everything else in your life financially is well structured. And once you’re stable, whether than sweating about when you should invest, instead focus on how long you plan on keeping money in the market. As a new investor in the game, focusing on individual stocks is very risky, and even if you’re a risk taker, beginners should get their feet wet conservatively by mutual or index funds opposed to individual stocks. This is a way to diversify your investment, limiting your risk greatly and also relieving you of having to research individual stocks, which takes diligence and skill. With mutual or index funds, your investment is diversified across the market where as if one or two individual stocks in your portfolio takes a nose dive, your stabilization will be more static. Stocks have historically been a safe bet, outperforming bonds, savings accounts, precious metals like gold and silver, Treasury bills and cash. Investing in the stock market for the long haul has traditionally produced higher success rates for investment portfolios, and most financial advisers recommend that investors whose retirement is more than 20 years away, hold at least 3/4 of their portfolios in the stock market. A good rule of thumb; don’t try to beat the stock market, participate in it.
Now that you have a basic understanding of how the stock market works, get involved. Investing may seem risky, but not investing is far riskier in the long run. Historically, inflation is around 3%, so that money you have stuffed in your mattress isn’t even keeping up as it is. Between 1926 and 2015 the stock market returned 10.02% on average per year. The biggest fear for many is outliving their savings after retirement, and for most, Social Security will just not cut it. With stocks’ superior returns over the long haul, getting started early in the market will give you the experience and opportunity to successfully set up your financial future after retirement.