An investment in knowledge pays the best interest.
A knowledge of investment builds wealth.
First and foremost, I want you to remember this one thing from this article, even if you don’t remember anything else… YOU need to know and understand YOUR money and investments.
- Never stop reading and studying about money and investing.
- Do not depend on others to handle your money.
- No one will put your interests first like you.
With that said, here’s a few basic terms and things to understand about investing and the stock market…
- Stocks are share of ownership in a company.
- Stocks go up and down in value.
- You make money (build wealth) from stock ownership either by buying a stock at a lower price and selling it at a higher price or by earning a dividend from the ownership of the stock.
- Some stocks have dividends, some do not.
- Dividends are when a company, that you own at least one stock in, decides to share it’s quarterly profits with shareholders. If a company pays a $1 dividend for the quarter, this is $1 per share that you own. If you own 10 shares, and the dividend is $1, you made a $10 dividend. If the company paid the same dividend over 30 years, and they paid the $1 dividend every quarter, those same 10 shares that you bought at the beginning would pay you $40 in dividends per year, for 30 years. That’s $1200 for doing nothing other than holding a stock for 30 years.
- Companies that pay dividends can stop paying dividends if they choose to. There are no guarantees that a company will always pay dividends, although most large companies do continue to do so. For example, Microsoft (MSFT), AT&T (T), and IBM (IBM) have paid quarterly dividends consistently for the last 10-15 years. I am not recommending these stocks to purchase specifically, simply giving an example using well-known companies.
- Some companies also reduce dividends. Some increase dividends. Again, they can do so when they choose.
- A risky way to try and build wealth is to buy and sell stocks in very short periods of time. This is what “day traders” do.
- One conservative way to try and build wealth is to buy stocks over your lifetime (buy and hold stocks over 30-50 years) that pay dividends, and use those dividends to buy even more stock. This is called “dividend investing”.
- A stocks dividend yield is the yearly dividend amount (all 4 quarters of dividends added together) divided by the stock price. A yearly $5 dividend on a $100 stock equals a 5% dividend yield. A yearly $3 dividend on a $100 stock equals a 3% dividend yield.
- Imagine owning a wide range of dividend stocks, valued at $1,000,000. Let’s say they have an average dividend yield of 5%. Every year, you will make $50,000 in dividends for doing absolutely nothing. Now imagine having $5,000,000 in dividend stocks… and you earn $250,000 per year, doing nothing, with that same 5% dividend yield.
- You can sell a stock at any time. If you sell at a higher price than your purchase price, you’ve made money on that stock. If you sell at a lower price that your purchase price, you’ve lost money on that stock.
- If you sell a dividend stock, you will not continue to receive dividends. You do get to keep any dividends you’ve made prior to selling the stock though.
- Mutual funds are a large group of stocks that you purchase by putting money into the mutual fund itself. It’s called a “mutual” fund because many people put there money in as a group and buy large amounts of stock together. You are not in control of the stocks purchased or sold in this mutual fund. You are are investing in the fund itself, not so much the stocks. If you have no idea what stocks to buy, it is considered a conservative approach to invest in mutual funds. That said, as I pointed out at the beginning, I don’t believe in buying/investing in anything you don’t understand, and I don’t believe throwing money into mutual funds is conservative if you don’t know what you’re buying. Not all mutual funds are the same.
- An extremely conservative approach to investing in the stock market is buying into a fund that purchase shares in a stock market index. If you look at historical data, there have been ups and downs (serious ups and downs), but over the history of the stock market, it always ends up, not down. You may have to wait years for a full recovery though. The stock market is not a short term investment plan. For example, the most recent “crash” was in 2009. From 2007 to 2009, the stock market trended down (per Dow Jones Industrial Average), dropping from 14,000 to 6,600. That’s over a 50% loss in value. So if you owned this group of 30 stocks, and average value of each stock was $100, they were valued at $50. If you panicked and sold at the bottom, you lost half the value of your investment. Here’s the good news, though. Since that time, the DOW market has recovered and gone to about 26,000! If you held those stocks, they’ve recovered and now would be valued at almost $200. And better yet, if you bought MORE shares at the bottom of the market, your money has quadrupled. If you bought $10,000 of shares at the bottom, those same shares are worth about $40,000 now. Dow Jones is what’s considered a market indicator. Just because it goes up or down doesn’t mean your stocks go up or down (unless you own those specific 30 stocks). The bottom line is if you can buy and hold investments for a long period, you’ll more-than-likely come out ahead. You never lose investment money until you sell the investment (at a lower price).
- Generally speaking, when a stock that you believe in goes down, you should buy even more shares. If it was worth buying at $25, isn’t it worth even more to buy at $15?
- There are income tax considerations with making and losing money in the stock market, too. Don’t let this scare you. Just be aware. This blog is about building wealth, so we’re encouraging you to save, not withdraw/spend. If you take money out of retirement accounts before you are of retirement age, there are usually penalties. There are pre-tax ways to save and post-tax ways to save. There are IRAs, 401ks, and SEPs… for the most part if you invest and save in these accounts, you do not pay taxes on it until you pull the money out at retirement. You’ll want to get more financial advice from a CPA in terms of taxes and tax planning.
- Bonus note: You used to get an actual piece of paper when you purchased shares of stock. It would have the company logo on it, your name, the value, and how many shares you owned. It used to be a cool gift to buy shares of stock in a company and gift them to a newborn. This is all handled electronically now.
There are many ways to make and lose money investing in stocks. With this post, I simply wanted to highlight some basics. I probably went a little more into it than I planned when I started. But I wanted to make sure I covered most of the basics. There are a number of financial blogs out there (just google “financial blogs”). Hopefully, this gives you a more basic understanding than you had when you started.
- Keep reading and learning.
- Don’t take any one persons advice on money.
- Learn and make your OWN decisions.
- And RUN from anyone who tells you they know everything about money — of they have a “for sure” investment deal.