So, you got your hands on a bit of money and want to grow it. Either you've heard about inflation devaluing money, want to have more money for the future, or it just seems fun; for whatever reason, you want to start investing. But where to start? What books to read? Which guru's advice to follow? What accounts to open? So many questions, so many answers, and no conclusions drawn.
You might be tempted to jump right in and start throwing money at whatever, according to media, the most popular investment is. Or you might think that you're in way over your head and just give your money to someone else to handle. Based on my (relatively limited) experience: DO NOT do either of those things. The best thing to do is to spend a little time to really understand what investing is all about. This way, you can make informed decisions about what to do with your money and take ownership of your finances.
How am I certified to tell you about investing? Well, to be honest, I'm not. There are plenty of other investing professionals out there who have fancier and more sophisticated advice. All I have is a little time in the markets and some private equity experience. If you want a thorough breakdown of the fundamentals of investing, I'm not your guy. But, in this post, I share what I've learned about investing so far, and all the takeaways that I feel are important for someone who's looking to enter the markets. If you're interested in that, read on!
What is Investing
So, what exactly is investing? Well, the essence of investing is basically using something to make more of something (usually money). Sounds confusing, but that's because there are so many things you can invest WITH, and so many things to invest IN. Using money as an example, someone could take $100, INVEST it in something, and come out with $110, making a smooth $10.
Investopedia defines investing as:
Three of the biggest “resources” that people invest with are:
Some of the biggest (and most common) investments are:
- Real estate
School as an Investment
Using school as an example, let's say that you are attending a university which has a tuition of $20,000 every year. You want to be an engineer, but you can't do so without a degree, so you need to attend university. Over the course of 4 years, that is an $80,000 investment.
Speaking purely in terms of money (disregarding time and energy and joy of the job), the return on investment would be how much more money you could make with the engineering degree than without it. The median salary for someone without a college/university degree is $30,000. The median salary for an engineer is $80,000. If all goes well, that would mean that your investment of $80,000 generated $50,000 for you every year that you work.
Over the course of a normal working life of 40 years, the final investment would come to 40 years x $50,000 = $2 million dollars! Your investment of $80,000 turned into a total of $2,000,000 over the course of 40 years.
Stocks as an Investment
Stocks might seem really complicated, but all they are is a piece of a company. Right now, Apple's stock is trading at around $120, which means that for $120 you could own a little piece of Apple.
“Could you keep buying pieces until you owned the whole company?”
Actually, yes! In fact, once you buy a large enough percentage of any company's stock, they let you vote on decisions that happen inside the company. If you decided that you wanted to own Apple and call all the shots, you would just need to buy all of the available stocks for Apple. This would, however, cost you around 2 trillion dollars.
The stock price of a company goes up and down based on two things.
- How good the company actually is
- How good people think the company is
This might sound weird, but the price of the stock changes based on what people THINK about the company. A company could have terrible operations and be close to bankruptcy, but if the public thinks that the company will do well, the price will still be high. On the other hand, a company could be amazing, but if the public thinks the company will crash and burn, the stock price will be very low. However, most of the time, the public's evaluation of a company is pretty accurate.
How would investing in the stock market work? Well, let's say you buy Apple's stock right now at $120. Next week, Apple comes out with the all-new iPhone 13 with 5 cameras and an even smaller screen than the iPhone 12. People love it and it's expected to do well, so tons of people buy the Apple stock. The stock price goes up to $140, you sell your stock, and walk away having made $20.
Real Estate as an Investment
Real estate might seem really simple: everyone owns a house, duh. In reality, however, investing in real estate is pretty complex with many different types and angles.
Generally speaking, money made from investing in real estate is made in two ways:
- The value of the property goes up from the time that you buy to the time that you sell
- Tenants living in the property pay you rent
A common real estate investment might go something like this. You see a house that is sort of run-down but has potential. The property is selling for $300,000 and you buy it. Then you spend $50,000 repairing the house: taking out walls, installing new furniture, changing the flooring. After a few months work, you sell the house for $400,000 making $50,000 through the investment.
Why Should I Invest?
Investing is by far one of the best ways to build wealth. Most Americans and Canadians retire with less than $100,000 in their savings account. If they had consistently invested in either stocks or real estate, they would have retired much much wealthier, and had a lot more freedom to do whatever they wanted in retirement.
Also, it's fun! I don't know about you, but the idea of leveraging a resource for profit seems really appealing to me. I would much rather have money work for me than the other way around.
Investing's Risk and Reward
So, what's the hold up? Investing sounds like a sure-fire way to make money; tell me where to start! Well, not so fast. Along with every gain in investing comes a risk.
- With school, there is the risk that you end up regretting your path or can't find a job out of university
- In the stock example, there is the risk that people DON'T like the iPhone 13 and the stock goes down, or worse, Apple goes bankrupt and you lose ALL your money
- In the real estate example, there is the risk that nobody wants to buy the house and all of a sudden, you're responsible for paying an extra mortgage
Typically, the higher the risk, the higher the potential reward. You could keep your money in the bank and have it earn 0.5% every year almost guaranteed. OR, you could put your money in the stock market to potentially earn 10% every year with the risk that you could lose money.
Just like with most things in life, there are no guarantees with investing. With any investment, there is the chance that it will go bust and you will never again see the money you put into it. But, the more risk you choose to take on, the more potential there is for greater reward.
Time Horizons: Mitigating Risk
There is a way to mitigate risk, without lowering your potential reward. It's called: staying in for the long haul. By staying in an investment for a long period of time, you significantly reduce the risk while keeping your upside.
Take a look at this chart:
This is a chart showing the historical odds of losing money based on how long you are in the stock market for. This is for the Singapore stock market, but if you look at America's and Canada's, you will find the same pattern: staying in the market for a longer time pays off!
As you can see, historically, there has never been an instance where holding the stock for 20 years or longer resulted in a loss.
Am I saying to never invest with a 1-5 year time horizon? No I'm not, but I do want you to be aware of your odds if you choose to pursue a short holding period.
How to Get Started
If you're like most students, your educational path is already pretty much set, and you probably don't have enough capital to start investing in real estate. This leaves stocks as a feasible investment option.
Getting started investing in stocks is a relatively simple process:
Make a “brokerage account”
Your bank will be able to open up one of these for you, but a lot of them charge commissions on stock trades. I personally used Questrade and Wealthsimple. If you're just starting, I recommend checking out Wealthsimple: an intuitive user friendly trading app.
Do research on the stocks you're thinking about buying
After opening up the account and transferring in some funds, you will have the ability to buy whatever stock you want (as long as you can afford it.) There are tons and tons of companies out there but I recommend taking the time to research whatever you're buying, so you know what you're getting into.
Also, you're going to need to decide whether to go for stocks or ETFs. ETFs are essentially bundles of stocks and has its own set of pros and cons. I get into it way more in this post.
Start small, but definitely start
There are plenty of stock trading simulators out there but I highly recommend trading with a bit of your own money. Most of the simulators are highly accurate, but until you invest with your own money, you won't know how you'll actually react to market movements.
Start small with an amount that you are okay with losing, and work your way up from there. You'll soon learn what you feel on highs and lows and what you're tempted to do when the market moves.
If you're going to take away a few key things from this post, hopefully they are:
- Investing is using something to create more of something (usually money)
- There are many resources you can invest with, and many investments that you can invest in
- There is a risk that comes with every investment
- Typically, the longer the time frame, the less risk you are exposed to
- Start small and work your way up
So, you know what investing is now. You know why it's a fantastic tool to build wealth. And you know how to create a brokerage account (for stocks). My hope is that this post serves as a starting point for your investing journey, that it motivates you to start looking at investments, to do your own research, and to begin! Good luck and happy investing!
Thanks for reading through my post! I hope you learned a bit about investing and/or had fun reading it. For more about achieving financial freedom, head over to this post. For more about me, head over to this link here. Finally, if you want to follow along with my journey, drop your email in the “get updates” box (might have to scroll up a bit)! Let me know your thoughts and suggestions in the comments!
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.