If you’ve landed on this page, you are here to get quick answers to all the questions you have about investing. Investing 101 for Millennials is in session.
If you already understand what stocks are, are set up with a platform, and are ready to invest, here are 5 ways not to lose money in the stock market!
Why Should You Invest?
Is stashing your cash in your 0.1%-1.0% checking/savings account safe? Yes… safe from a robber, but not safe from inflation. According to the U.S. Burea of Labor Statistics, since 1982 the United State’s average inflation rate per year has been about ~2.5%. This means that on average, every year consumer goods and services are becoming 2.5% more expensive. So the money that is in your bank account is actually losing its value every year (losing purchasing power) because you are only getting 1% interest payments on average.
- Saving for retirement?
- Building a college fund for your kids?
- Don’t want to lose purchasing power in the bank?
The stock market is a great tool for achieving those goals.
The Historical Average Stock Return
The historical average yearly stock return is 10%-11% (S&P 500 from 1926 to 2018). When people mention the “market” they are referring to the S&P 500, which is an index of the 500 largest American traded companies.
What Return Should You Expect?
There are no guarantees. Past performance does not indicate future performance, but the 10% average has held steady for over 90 years. If you plan on focusing your investments for the long-term (buy and hold, you’ll be able to ride out any volatile years and migrate towards the average). Some years you will make more than 10% and some years you’ll be below 10%, but if you hold over the long term you’ll be able to ride out any down years.
If you plan on day-trading, this average will not apply to you. Countless studies have shown that even professionals struggle to beat the market. I recommend hitting Vegas for your gambling rush.
How Does Compounding Work?
Compounding: this is the key to the stock market, and the beautiful thing about long term investing. I am going to teach you this just how my Baba taught me it when I was a kid.
Scenario 1: Let’s assume you are putting $10,000 into your investment account to start, and you will be adding $0 dollars to it over the next 50 years. Let’s assume your yearly interest rate will be 8% (less than the historical average to be safe).
50 years later under Scenario 1, your $10,000 will have grown to $469,016
Scenario 2: Same initial investment of $10,000, but you’ll be adding $1,000 to your account every year, and your interest rate will stay the same at 8%
50 years later under Scenario 2, your $10,000 plus yearly $1,000 deposits will have grown to $1,042,786
Patience and compounding, the recipe for success. Just look at Warren Buffet. My Dad showed me this graph as a kid; it was all I needed to get hooked onto long term investing.
Go and run your own scenarios HERE!
How Much Money Do You Need To Start Investing?
Back in the day, stock brokerages required a minimum account balance to open an account. Now with so much competition in the space, you can open an account without a large initial deposit. You can start with as little as $1.
Brokerages allowing you to buy partial shares of a company have made it easy to start with very little money. If you start with too small of a figure, you will not spend the extra time needed to understand whether a company would be a good investment or not, since your risk exposure is low. You need to start building disciplined investment habits. Wait until you have enough money saved up where it would sting if you lost it, this is the “right” number to start with and is different from person to person.
Check out THIS article to learn how to pick great long term stocks.
What Platform Should You Use?
I have been using TD Ameritrade for 13 years and never found an issue with the platform. Most of my friends use Robinhood, they faced issues on high volume trading days. The app either glitched out or wouldn’t let them place trades.
TD Ameritrade is well known for its strong research tools and technical charts, but all of these platforms will accomplish the same goal.
The Basic Terms You Need to Know
An order to buy/sell shares at a specific price.
For example, let’s assume the current market price of a stock is $10
Limit Order: If I put a limit order for $9, it’ll automatically buy the stock if it reaches $9 or cheaper
Sell Limit Order: If I put a sell limit at $12, it will only sell the stock if it reaches $12 or more
A dividend is a distribution of earnings.
For example, if I had 100 shares of a company and that company announced a $1.40 dividend per share per year, after holding the stock for one year, I would have made $140 just in dividends, which usually show up as cash in your brokerage account.
This is an order to buy/sell at the current market price. What the stock is currently trading at.
We advise you only to use a market order while the market is open. Prices fluctuate after hours, and if you have a market order placed after hours, you might end up buying shares at a very steep price.
Investing 101 for Millennials Does Not Cover Advanced Concepts
Full disclaimer, I have been investing for a long time, and I don’t trade options, don’t trade on margin, and don’t short stocks. If you don’t understand what you are doing, you can lose a lot of money by using those instruments.
In Investing 102 For Millennials; we focus on more advanced topics such as shorting, options, margin, etc.
As always, if you have any questions, Just Ask Baba or comment below!
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