Investing in Stocks: The Beginners Guide
Have you ever wondered how the rich got rich and kept getting richer? Wanting to retire before shedding that mortal coil? Ready to invest, yet unsure how to begin? If answers to these questions are affirmative, consider the stock market. The finance world is extremely intimidating, but after learning some Wall Street lingo and related concepts, it get’s easier to understand.
It goes without saying that taking control of personal finances is not a way to cheat the world into filling bank accounts overnight. Recognize the sobering learning curve requiring full attention from investors, but the rewards are well worth it. Despite what we often hear, investing in the stock market doesn’t mean letting banks, bosses or investment professionals push money outside of a person’s understanding. At the end of the day, the only one who knows what’s best is the person holding the wallet.
By googling the term, you’ll find investment means to commit money or capital in an endeavor, with the expectation of obtaining additional income or profit. This means re purposing money, so it works for the investor, and not the other way around. We were raised to think the only way to earn income is to get a job and work. Most of us do. But the obvious problem is when more money is needed, working more hours may not be possible. Not everyone has enough hours to work. Worse still, those with enough money often lack the time to enjoy it.
Making money work maximizes earning potential whether or not there’s a raise from the boss, overtime to work or a high-paying job.
There are many ways to invest. A few of the places to put money into are stocks, bonds, mutual funds, real estate, or starting your own business. These are sometimes called investment vehicles, which means a way to invest. Each vehicle has advantages and disadvantages, but for now we’ll focus on stocks.
This mathematical miracle makes investing money possible. Compounding is the process of generating earnings on an asset’s reinvested earnings. Take this example: If $1,000 is invested today at 6%, it turns into $1,060 in one year ($1,000 x 1.06). But leave it alone and the extra $60 from interest starts earning interest the next year. If the interest rate remains at 6%, the investment grows to $1,123.60 ($1,060 x 1.06) by the end of the second year of investing.
Since the reinvested $60 works with the original investment, the second year’s interest becomes $63.60, $3.60 more income than was earned the previous year. Moreover, reinvesting, the new interest of $63.60 earns interest for the following year. After one more year, your investment will be worth $1,191 ($1,123.60 x 1.06). The third interest amount earned is about $67.42; $7.42 more than your first year investing. The increased amount made each year compounds in action (interest earning interest earning interest, etc.). This process carries on while interest continues to be reinvested and earning interest.
The earlier investing begins, the greater compound interest accrues, and more money earned. Compound Interest starts slowly, but as larger and larger numbers recycle through the math calculation, investment values increase at greater rates. For example, investing $15,000 with an annual interest rate of 1.5% at age 25, by 60, transforms to nearly $100,000 in the bank account (in a no fees account)!
Economy is a Social Science
In the natural sciences, like physics or chemistry, specific measurements, and extremely reliable laws can be replicated at any given time, in any given circumstance. However, despite the existence of theories attempting to describe how the economy works, there is simply no way to study the economy in a lab and perform objective experiments on it.
Since humans are the subject of social sciences, the field is inherently unreliable and chaotic. In this respect, there’s no difference between the psychologist’s struggle to predict how a single human mind reacts with perfect certainty, and how the market (i.e. a mass of people) reacts to news about an affluent company. Humans are emotional, illogical creatures, and this fact isn’t going to change.
Now that you understand compound interest, and the nature of the social beast, it’s time to create an investment strategy. Keep in mind there are no indisputable laws, nor does there exist one correct way to invest.
Consequently, within a multitude of different investing strategies, two completely opposite approaches may experience simultaneous success.
One theory about why contradictions in successful investing strategies exists is economics and finance are social sciences, and as such are not subject to precise measurements, rigid laws of nature or proofs.
There are plenty of successful investors in today’s world (hint, one is running for executive office), but, if the present’s social complicity is too much to bear, don’t be afraid to invest figuratively in literature about investment strategies, while testing theories in the months and years to come. Just remember, when it comes to investment vehicles, be check the brakes before starting the engine.
Jonah Engler is a financial expert with a background in entrepreneurship.