If you’re young and have yet to start investing, the stock market may seem daunting at first. I’ve found many people have preconceived notions when it comes to investing in stocks. We’ve all heard stories of people who struck it rich in the stock market as well as those who lost everything they had.
While it’s certainly true that some people have lost all of their money or made fortunes in the stock market, the outcome is usually not so extreme. Good investing is said to be very boring. What I mean by this is parking your money in a stock for years at a time and not constantly trading. In other words, long term investing.
I have also heard people compare investing in the stock market to gambling. Can investing in the stock market be considered gambling? Absolutely, but it doesn’t have to be. Your investing strategy or lack thereof will determine whether you are gambling or investing. Investing in a stock without having any knowledge of the company and why you’re investing in it would be in line with gambling, as you are just buying a stock and hoping it goes up in value. Learning about the company and having a clear reason as to why you’re investing in their stock would not be gambling. That being said, there is always some degree of uncertainty with any investment you make.
Now that we have discussed some common stock investing misconceptions, let’s get into the details about what a stock actually is and how to invest.
What is a stock?
Simply put, a stock is a portion of the ownership in a company. Therefore, as you purchase more stock you own a greater portion of the company. It’s fun to think that for a mere $153 (the price per share of Apple when I wrote this article) you could be a partial owner of Apple. In reality, if you walk into the Apple headquarters in Cupertino, CA you likely won’t be treated like an owner, probably more like a trespasser if you’re able to get in at all. This is because one share of stock is a minuscule amount relative to the total number of shares Apple has issued, which is around 5.2 billion.
While owning a few shares in a company may not give you the right to mosey on into their headquarters, it does give you voting rights within the company for electing the board of directors. The power of your vote is based on the number of shares you own, so if you only own a handful of shares your vote won’t have much leverage.
When discussing stocks people always refer to the stock market. As you can probably guess from the name, the stock market is a place where stocks are bought and sold. It’s literally a market place for stocks.
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How do you make money investing in stocks?
There are different ways you can make money investing in stocks. The most common way is to buy low and sell high. Pretty simple, right? For example, let’s say you buy 1 share of Netflix at $140 per share. Fast forward 2 years and let’s say Netflix is now worth $200 per share and you decide to sell it. You would make a total profit of $60 per share.
Another popular way to make money is by shorting stocks. When you short a stock you make money when the stock decreases in value. When you short a stock you don’t actually own the stock, instead the stock is lent to you by a broker. Once the broker lends you the stock, you immediately sell it and keep the proceeds. Eventually, you have to actually buy the stock back and return it to the broker who lent it to you.
For example, let’s say the broker lent a stock to you at a price of $100 per share, which you sell immediately and pocket the money. Let’s say 1 month later the stock decreases in value to $75 per share. You can then buy back the shares at $75 per share to return to the broker and make a profit of $25 per share. The reason you make $25 per share is because you were lent the stock at $100 per share then returned it to the broker at $75 per share and pocketed the $25 difference. Alternatively, if the stock goes up in value you will have to buy back the shares at a higher price and lose money.
I admit that shorting stocks is not as straightforward as the buy low sell high strategy. It can definitely be confusing at first. If you’re a first time investor, I do not recommend shorting stocks as you run the risk of losing an infinite amount of money if the stock you short keeps rising in value and you never sell it.
Another common way to make money is through dividends. A dividend is simply a cash payment a company gives you for every share of their stock you own. Not all stocks pay dividends, but it’s easy to finds ones that do. Dividends can be paid out quarterly, biannually, or annually.
These are not all of the ways you can make money investing and trading stocks, just some of the more common ways.
Who can trade stocks?
The main limitation to being able to trade stocks is age. In the U.S., the required minimum age to trade stocks ranges from 18 to 21 years old depending on the state you live in.
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How to start trading.
To start trading stocks you will need to open an account with a brokerage. In the past this meant calling or going into an actual brick and mortar brokerage firm. Nowadays most stock investors use online brokerages and trading platforms. The only disadvantage to using online brokerages is that you typically don’t have access to investing advice from a stock broker as you would with a traditional brick and mortar brokerage. The advantage of online brokerages is that trading fees are often much lower.
There are loads of online brokerages to choose from. Some of the most popular are:
Capital One Investing
All of these online brokerages offer their own unique advantages depending on the types of investments you want to make, your investing style, and how much money you plan to invest. For example, if you’re making frequent trades you likely want to choose a brokerage that has low trading fees.