Money Basics Series: Stock Investing 101
Alright guys, this is the first of many “Money Basics Series” articles. My goal in writing these is to serve as a resource to get more finance-related knowledge out there in an accessible, digestible and fun way. I want each and every one of you to feel financially-empowered and equipped with the right tools to make decisions. For this edition, we are starting with stock investment which is one of the biggest tools of building long-term wealth.
What is stock? When you invest in the stock market, you are purchasing ownership in a company. So when you purchase stock in Ulta or Apple, you own a piece of their company and participate in their growth. As the company makes more money and becomes more profitable over time, you will see the stock price increase. The value of your investment in that company will increase as well.
How can you invest in the stock market? There are a lot of different types of investment accounts you can use to access the stock market. The most common way people invest is through their 401(k) plan at work. However, you can also invest through an IRA (another retirement-focused account), 529 accounts( education-focused accounts) or regular brokerage accounts. The type of account you should choose is going to depend on a host of factors such as your goals, your individual tax situation, family size, investment time horizon, etc.
When should you invest? Only once you have eliminated all high-interest debt like credit cards, personal loans, etc. AND have established an emergency fund would it be advisable to invest. If you have high-interest debt(think 9%+ here), you’re costing yourself more money than you’d make in the stock market by not paying it off ASAP. However, once you are ready to start investing, I recommend clients prioritize long-term invested funds like retirement. You should aim to contribute 10-15% of your income towards that. Your 401(k) is a good place to start. If you don’t have access to a 401(k), then opening a traditional or Roth IRA is also a good option. If you don’ think you can go from 0% to 10% right away, start at 5% and move it up by 2% every year.
What are the risks? Although investing in a broadly diversified stock portfolio is a crucial part of building long-term wealth for many people, it is not without risks. Just like the general economy is subject to boom and bust periods, stocks will experience similar volatility as the companies they represent. Therefore, it is crucial that you understand how much risk you can afford to take, what your investment time horizon is, and to know that the long-term return on investment is only rewarded to those who invest systematically and ignore the short-term volatility in exchange for the long-term growth prospects.
What are the rewards? Well this is the fun part! Stock investing has been shown to be one of the most accessible and effective tools to build long-term wealth. Over the period of 1926-2014, the S&P 500 index averaged a 10% annual rate of return.
I hope this is helpful for you guys and gives you a good rundown of stock market basics. I’ve listed a few resources down below if you want to read and learn more. You can also reach out if you want to discuss one on one!