Invest Money

Invest in the stock market

A great way to invest your money is investing in the stock market. Although it might sound scary or complicated if you’ve never done it before the truth is it is quite simple and it can yield some great returns.

Let’s face it, coming up with a great idea and executing it successfully to the point where it makes good money consistently is tough, very tough. Not because we aren’t smart, not because we aren’t dedicated, but just because there are so many bits and pieces that need to come together in the right way at the right time.

What the stock market does is that it allows individuals like you and me to invest in already established companies (those that decide to go public) and profit (or loss) from their business. That’s right, when you invest in the stock market you are buying stock from the companies you choose to invest in, and that stock is nothing less that ownership in that company. So when you buy a share of Apple you actually own a tiny, tiny, tiny percentage of the company.

Investing in stock vs index funds

There are other ways, but generally speaking you can choose between investing in stock from an individual company (aka Coca-Cola, Apple, Microsoft, Nike, etc.) or investing in index funds, which group stocks from several companies.

Both of course have pros and cons. If you invest in a single company your fate is tied to that individual company, if they do great you’ll do great, but if they go under you’ll loose all your money. On the other hand investing in an index fund you’ll be casting a much wider net, spreading your investment across hundreds, sometimes even thousands of companies. Some of those companies will excel, others will disappear, but your fate will not be tied to any of them individually but to how they do averagely.

With this in mind investing in an index fund is probably a safer bet and will require less research and time.

If you want to safely invest in an individual company you’ll need to research that company thoroughly, their trajectory, their finances, they plans for the future… and that requires some skills and takes up time. On the other hand if you invest in an index fund you just need to research the fund and their trajectory for the past years.

If you are considering investing in the stock market just your money isn’t sitting still in the bank and are not interested in learning much about it index funs are the way to go. If on the other hand you think you might like to study and understand the in and outs of trading a bit better it could be a good idea to put half of your money into an index fund and “play” around with the other half investing in individual companies. This way you’ll also be able to compare your performance vs the index fund by the end of the year.

How much money can you make investing in the stock market?

Investing in the stock market is not a guaranteed investment like a savings account might be, so you can actually loose all your money if everything goes wrong!

Now that being said history tells us that the market will, on average, grow over the years. I’m sure an economist could give a much more accurate explanation of why that is, but breaking it to the basics, companies are there designed to grow. I don’t think there is a single public traded company out there that’s thinking “I think this is fine, you know what I think this is enough, we don’t need to grow any more”. Big companies are always looking for ways to grow, and if they don’t succeed chances are they will eventually go the other way and get smaller and smaller until they’ll disappear (think Yahoo!).

So how much do companies grow over time? If we look at one of the most well-know index funds out there, the S&P 500, which groups 500 of the largest public traded companies in the US, history tells us around 10%. Not every year, some years the market will grow 15%, others 6%, in a single year it might even actually shrink an go to a negative percentage, but if you invest your money for a period of 5 to 10 years a 10% annual return is what you can reasonably expect.

So if you were thinking in investing some money and leave it there for some years an index fund can be a very attractive investment, with a decent level of security (the longer the investment period the higher the security) and needing virtually cero of your time once its set up.

Things to consider

If you are ready to start investing in the stock market you’ll need to find yourself a broker, that is someone who has a license to actually go to the stock market (it’s all done virtually these days, but you still need a broker) and buy and sell stock for you. You can use your bank as a broker or you can hire a dedicated firm. What you need to consider in either case is that your broker will want to get paid and they usually expect payment in two ways:

  • Trading fees. A fee you’ll have to pay every time you want buy/sell stock.
  • Maintenance fees. A fee that you’ll pay periodically while you own the stock.

If you are investing in the stock market long term you want to look for the lowest maintenance fees possible. After all you’ll probably be buying some stock initially and then sitting on it for some years, so you want to make sure the maintenance fees are not eating up your profit year over year and you end up with the same amount you started or less even though the index fund or stock you invested in might have grown.

If you are looking to buy and sell stock quickly, only keeping it for short periods of time, maybe even just a few days, then you want to look for the opposite, the lower trading fees possible.

If you are thinking this doesn’t make sense in the XIX century when everything is done on-line and your broker isn’t actually on the floor of wall street yelling his lungs out, I agree, and apparently broker firms know it too and are charging less fees every day and trying to sell you other financial services such as financial advisors, etc. What this means is if you look around a bit you should be able to find an account that will allow you to trade for cheap (maybe $10-$20 per trade for low trades) and with no maintenance fees (sometimes contingency to making a trade every six months or so).