How to properly invest your money in the stock market
I love talking to anyone about the right way to invest their money. My goal with this article is to clarify the misconceptions about investing in the stock market. I am not a financial advisor, but I am a qualified associate financial planner. With that said, I will not say I’m an expert to make investment decisions on anyone’s behalf. I have been investing myself and I am currently advising people about investing and personal finance as a side hustle.
People who say that investing in the stock market is no different from gambling don’t know how to invest. It is frustrating to me that people simply take the words of others and run with them. Realize that I have been saying invest, not trade. I think investing gets a bad rap because of people who view the stock market as a casino and not as what it literally is: a stock market! Here are the common reasons why people avoid investing in the stock market, and my responses to them.
“What if I lose ALL my money in the stock market?”
If you don’t already know what a stock market is: a “stock” is partial ownership of a company, “market” is a place where you buy and sell something. The only way you can lose all your money is you chose to buy into a share of a dying company and go bankrupt. Just like you would not go shopping for a low-quality product, you wouldn’t be buying a low-quality business. You don’t lose money by owning a company unless they go bankrupt and close down. So why would you buy a company that is going bankrupt when you have plenty of options in the market?
“Investing is risky!”
Risk has many associations, and I am going to define the risk specifically to investing here. The risk associated with investments is how volatile the price of a stock is; how much the price of the company goes up and down. What makes a stock more volatile than others? First, we need to know why the prices of a stock move up and down so much.
Contrary to popular belief, prices don’t move up and down because of the company itself. Prices move up and down because people buy and sell the stock of that company. The prices are the reflection of the sentiments of the investors of the company. Volatile prices are a result of emotions and uncertainty. Therefore, if you don’t like this “risk”, then simply look at companies that people are confident in. These companies are known as “blue-chip” stocks because they are stable companies. What makes a company or stock stable? A company with a proven business model and that people trust. Think Apple, Microsoft, Johnson & Johnson.
“I can still lose money when the prices go down.”
By leaving money in the stock market, you at least have a chance of preserving your money. You lose money to inflation by leaving it in your bank account. in very simple terms, inflation is the expansion of the economy which results in your dollar losing value year after year. The trick here is to stay invested no matter what happens, for a long, long time. I recommend at least 30 to 40 years if we were to refer to literature because it is reported that virtually no one loses money staying invested over a 40 year period. Before getting into investing, save at least 6 months’ worth of your expenses before you start setting aside money for investments. The key is thinking of this invested money as money you can afford to lose. Dollar-cost average and forget about that money. The risks are higher the shorter the time invested, so if you cannot stomach the risk, then invest money in other less risky assets like bonds.
Here’s some math for you. Invest just $100 a month for 40 years at the stock market benchmark rate of 8% gets you $335,737. If you adjust for inflation at 3%, you would have $146,540. In those 40 years, you have put in only $48,000. If you had left it in your bank account that pays you a generous 2% with the same rate of inflation, you would have lost $8451. For this reason, you are a college student like me, investing in the stock market for 40 years sounds like a fair deal.
“It’s too much to learn, I don’t want to waste my time.”
Fair enough! If you fall under this category, but you don’t want to lose your money, there are many ways to automate investing. You can put your money into mutual funds, where it involves you paying a small fee to have a professional handle your investment for you. There are other resources online, articles and videos, on how you can invest without needing to dive deep into the world of investing. Platforms like Robinhood allow you to buy partial shares, so you can invest $1 in anything to dip your toes into investing! If you still find blue-chip stocks too volatile, you can explore bonds as well!
I hope that you will start to realize your hard-earned money can do better for you. Instead of working against inflation, make things easier by putting money somewhere that makes more money for you.