In the midst of understanding where life intends to lead you, in addition to passion, job security and fulfilling personal goals, financial stability is considered to be one of the most significant factors for students when deciding a career path. Oak Park High School offers a classes that help students grasp the fundamentals of financial literacy such as AP Macroeconomics and Intro to Personal Finance. In this series, I will explore a deeper understanding of various financial concepts, how to utilize them and how they can benefit you both in the short and long-run.
Have you ever thought about skipping out on your daily matcha latte to start saving money? Immediately, you start counting how much money you’d be able to rack up over the course of a month and realize how expensive your morning sweet treat really is. But at the same time, sacrificing a pleasing way of starting out the morning isn’t of any interest to you. Luckily for you, when you learn how to invest safely, the benefits far outweigh the sacrifice.
By learning how to invest earlier on, and starting independently when you turn 18, you are ensured more money from compounded and accumulated interest and more time to experiment, allowing you to take on more risk in your initial investment portfolio. Additionally, by taking control of what you know about finance and understanding all the different paths you can take, you build a good set of financial habits along the way.
Here’s everything you need to know to start investing with stocks:
Imagine a world where you could be a part of a multi-trillion dollar company and profit off their successful investments if you learn how to manage your finances correctly. That would be Earth. By purchasing a stock, or a share of a company, you become an investor and officially own part of the company from the stock you purchased.
The number of shares depends on the company. Larger companies like Amazon have approximately 10.66 billion shares out on the market, while Triton Valves has around 1.2 million shares. Companies as a whole decide how many shares they want to give out. If you purchase your share directly from the company, it’s an Initial Public Offering. Your money goes directly to the company, and they are free to use it however they like. They may invest in new products, expand, pay off debt and more. All of these decisions affect the company and your stock price.
When a company does well, the price of the company goes up. Naturally, investors who want a piece of the profit will want to buy a share of the company. But since the supply of shares is so limited, there’s going to be a demand. If the demand is higher, the price of the stock goes up.
Let’s say you’re happy with the amount of money you could earn after selling your shares. You can then sell your stock by heading to the online economic market through your brokerage account– which opens around 9:30 a.m. – 4:00 p.m. EST–and put in a request order for the stock you’re selling, the quantity and the amount you’re willing to sell it for.
When your stock is high in demand, people from all over the world who want a share of the company can bid for it–like on Depop–which potentially earns you more than what you originally made, also known as capital gain. If you decide to sell your share when demand is low, people can negotiate the price you enlisted on the market, and you’re most likely not going to earn profit. Regardless of what happens, what matters is that you’re getting experience, and this is a huge benefit in the long run.
This all sounds great right? But how in the world are you supposed to know which companies to invest in? In addition to making money, there’s also the possibility of losing money if the stock you purchase goes down. Along with looking at the health of the economic market and checking in on how the company is doing financially, another quick way to look whether a company is worth investing in or not is looking if they provide dividends.
Dividends are a type of passive income that companies pay stockholders as a reward for investing in their companies. When companies make profit from successful investments, they can either reinvest that money back into the business or give it to their shareholders. Therefore, dividends usually signify that there’s a steady income for the company, and that they have a predictable upward trend of financial performance. This isn’t always the case, but on average, dividends are a good sign to invest.
If you still aren’t sure, you can also purchase an index fund. An index fund is a type of investment that allows you to invest in a bunch of different company’s stocks. The S&P 500 is a great example of an index fund investment. This index fund takes the 500 top performing companies and invests for you. After choosing an agent that you trust to invest for you, you give them your money and they handle it from there. Index funds are also known to be less volatile than stocks, so it’s a great choice for beginners.
A dividend fund would also be another option. A dividend fund consists of properties of an index fund –purchasing a bunch of stocks at once– and a dividend, meaning all the shares will be dividend stocks. By purchasing a dividend fund, you no longer run the risk of losing the passive income of a singular dividend if the company decides to no longer offer it. You can then rely on the passive income of the other dividend stocks in the time being.
Now you know the basics of what a stock, dividend and index fund are. Regardless of where you want to place your money, whether it be on an $8 latte, or your first index fund, it’s never too early or late to start investing. Next time, we’ll dive into another way to invest through mutual funds, exchange-traded funds and Robo-Advisors.
