We’re so fortunate to live in the age we do. Has there ever been a better time or place in history to create a prosperous life for yourself and your family? All it takes is the right behavior and smart investing. Investing in the stock market is a great way to accumulate wealth and it has never been easier. In 2019, you have the ability to buy stock right on your phone!
The stock market is exciting! There are over 5,000 companies — in every conceivable industry — that trade on the New York Stock Exchange and Nasdaq. You can buy stock in companies you encounter every day like Coca-Cola, Exxon, Walmart, Amazon, McDonalds, Hershey, Verizon, AT&T, or Barnes & Noble. Do you like watching Netflix? With stocks, you can own part of the company. The opportunities are endless.
What’s great about buying stock is you become an owner of that company. The next time you’re standing in a line at Target or Starbucks, look around. If you own the company’s stock, you can take pride in the fact that you are an owner of the business. It’s not just traditional businesses either. You can own stock in the most innovative and exciting companies — like Facebook, Apple, or Google — and take part in their success.
Being an owner of stock allows you to prosper with the company, and you can make money from your stock in two ways.
The first is when the stock price appreciates in value. If the growth of a company and its future profits look promising, the company attracts investors, who in turn drive up the price of the stock. If that happens and you own shares, you too will see your investment grow.
The second way to make money is through dividends. When a company is profitable, shareholders can receive a portion of the profits in the form of a dividend. However, not all companies pay a dividend. For example, young growth companies may choose to reinvest all their profits back in the company instead of paying out to stockholders. The decision of if, when, and how much of a dividend to pay is made by the board of directors.
But always keep in mind that there is risk investing in stocks. Historically, the stock market has increased in value over the long term. But not without volatility and years of negative returns. As promising as investing in stocks is, there’s no guarantee that the stock market will continue to rise. And even if it does, you should anticipate periods of volatility and negative returns.
If you’re going to invest in stocks you need to be prudent. Here are some tips:
- Investing in the stock market is for the long term. Money needed in the short term should not be put into the stock market. It’s too volatile. Your investment can lose its value pretty fast and may not recover in time for when you need the cash. Over the long term, for example ten or twenty years, you have time for your investment to recover.
- The money you invest in the stock market should be part of an overall asset allocation strategy. Your money should be invested in the right mix of stocks, bonds, cash and cash equivalents, and could include other asset classes such as real estate and commodities. Not all asset types have the same amount of risk. Bonds, cash, and cash equivalents historically have not had as much risk as stocks, but they also haven’t had as great of a return. By including less risky assets, such as cash and bonds, you can reduce the overall volatility of your investment portfolio. Generally, the more time you have before you need your money, the higher percentage of your investable funds should be in stocks. As the time period gets shorter, the percentage invested in stocks should decrease and the majority should be in less risky assets.
- Make sure your stock portfolio is also diversified. Don’t put all your money in one or two stocks. What if things don’t go well with the company? All it takes is one negative event for your investment to crumble. You can reduce your risk by investing in a variety of companies across different industries. By diversifying, you can reduce the negative impact of an underperforming stock on your overall investment portfolio.
- Picking stocks is hard. I have no idea if the companies I mentioned above are a good investment. Sometimes it’s better to be a customer than an investor. Why not leave the stock picking and analysis to the pros? You can own a diversified portfolio of stocks indirectly by investing in mutual funds. Mutual funds have an investment manager or a team of managers whose sole responsibility is to find the best investments to meet the fund’s objectives. You can also invest using a managed account. Like a mutual fund, a managed account has an investment manager that makes all the investment decisions based on the account’s investment objectives.