I recently became a trader. And yes, like many others, what this really means is: I downloaded Robinhood.
For obvious reasons, I won’t be telling you how you should invest. I won’t even be telling you how I invest. In fact, I have no insight to give, whatsoever, that will benefit your trading in the slightest.
‘Oh. Why am I reading this then?’ I hear you cry.
Well, being fresh out of college and earning real money for the first time, I recently faced a new dilemma, ‘why do I have a spare $100 in my bank and what do I do with it’?
Naturally, I spent it on stocks. And I’m very glad I did. This article is about why.
Trading is a game of finding value. If you can anticipate when the public perception of a company’s value will increase, you win.
(Warning: Yes, this is a gross over-simplification that ignores the many trading nuances. Please direct complaints to: autodelete@junk.com).
Unfortunately for you, in this game of finding value, there are lots of clever individuals, companies and robots also playing. Even though it’s not a zero-sum game, you are competing with these guys to find that value, and it turns out they’re pretty good at it.
This means that, for a while, you’re not going to make much money. In fact, you’re more likely to make negative money. Consequently, ‘making money’ isn’t top of my list of reasons to start trading. In fact, it doesn’t feature in that list, at all.
So, my $100 might as well have been spent on slot-machines, right?*
I’d argue not.
1. It forces you to be intellectually invested
Let’s say I want to place a bet on the a team winning the Super Bowl. Normally I wouldn’t care much for either of the teams playing, however, having money on the game suddenly gives me a vested interest in knowing how well each team has been doing, what players they have, what their stats are this season, what makes them unique, what injuries they have etc. There’s a strong incentive to be intellectually invested to maximise my chance of winning.
My day-job (and evening-hobby) is tech, I studied CS, moved to SF to work in the epicenter of the technology world and I spend far too long reading HackerNews everyday. Despite doing all of the above, I have never given much thought to the movements of the tech world on the stock markets.
On both a micro and macro scale, investing forces you to think about where companies, industries and markets currently are and where they’ll be. Are we currently in a tech bubble and is it about to pop? How did the markets react to the Tesla 3 release? When will Uber IPO and what will happen? Is the Augmented Reality market growing and why? Why were there no tech IPOs in Q1 2016? What do the stock markets think of wearables? Why is NFLX valued at $X billion? How do you even value a company? What data can I use to make predictions about market fluctuations? Where is tech going?
I’d argue that it’s great (if not crucial) for anyone in tech to be asking these same questions, regardless of whether you invest. The answers to these questions not only shape your career and the company you work for, but more importantly the future of the world (it sounds cliche, I know).
For me, this is reason enough to start trading.
2. Learn how trades works
“What if I don’t care about tech (or some other domain)? I just want to trade.”
I’m glad you asked.
Obviously trading is more nuanced and complicated than I previously let on (sorry). Generally stock-brokers go through multiple rounds of certification before being licensed, covering everything from stocks, bonds, mutual funds to transaction law, business practices and ethics.
Trading, is a great way to get to grips with the concepts and processes that underpin the actual trading. This means you end up with a pragmatic understanding of how trading works, rather than a brain full of memorised technicalities.
3. Learn why trades work
Knowing whether a trade was successful or not is straight-forward; the holy grail is knowing why it worked (or didn’t). If you know why, you can start to make informed decisions about your future trades and (hopefully) do better than before.
By starting trading, you can begin to build up a history of trades, some of which worked and most of which didn’t. Study these and try and figure out why. Rinse, repeat.
4. No barrier to entry
Trading in public markets, is by nature, open to everyone. And yet it’s always been difficult to get into. This is despite a movement for a long time to allow lay-people (myself included) to trade.
The first barrier was one of expertise and knowledge. Lot’s of people didn’t know how to trade and didn’t want to learn. The industry grew and evolved to accommodate them by providing funds, financial advisors and portfolio management.
The second was financial. It wasn’t feasible for someone like me to invest small amounts of money because of the massive overheads. This is where Robinhood comes into play. Free trades allow you invest with pocket change. To quote Robinhood cofounder, Vladimir Tenev:
we felt that it should be possible for people to start investing with $50 — $100 and not lose 10–20% of their principal just in transaction fees
So, should I start?
You’re now, obviously, thoroughly convinced of the benefits trading (so much so that you may want to share this article).
But, is it worth sacrificing your money to the stock gods?
Firstly, I’ve perhaps overstated the risk of losing money from investing. In fact, 6 months later I’m currently 25% up. Whilst it wouldn’t be wise to extrapolate from this small sample, it does show that losing money isn’t inevitable.
Secondly, you can start with tiny amounts that you’re happy to lose. Buy one less coffee each week and invest the money you save (or try Acorns). The best time to get burnt is now (with coffee money).
Disagree with all of this? Ok, if nothing else, start trading and you’ll have something to say at your next dinner party.
*Note: The stock markets are definitely not slot-machines, however they can be treated as such. If you have a problem with gambling, then proceed with caution.
