The stock market can be mysterious for persons interested in becoming investors. Reading news reports about how the market swings from one direction to another can lead to confusion. Some may wonder what happens when the Dow Jones drops 600 points one week and then rallies back 400 the next. They might wonder whether people are gaining or losing or if the stock market is the right vehicle for their money. Only individuals can decide for themselves whether to put money into the stock market or another investing strategy vehicle. Reviewing a few essential points about the stock market could help a would-be investor make more informed decisions or, at the very least, feel prompted to learn more about the subject. Such insights could keep someone from putting money into high-risk vehicles that jeopardize their savings.
What is the Stock Market?
The stock market is a collective of publicly traded companies that sell shares. Shares indicate ownership in the company, and shareholders can see their value grow if the value of the share increases above the purchase price. The shares are purchased not directly from the company but through a brokerage house.
Factors such as profitability, regulations, and other influences will contribute to a stock’s performance. The stock price can fluctuate throughout the year, and the person holding the shares can sell at will.
The Stock Market, Risk, and Growth Over Time
Different investors will have unique approaches to investing in the stock market. However, it is commonly accepted that one of the better strategies involves purchasing blue-chip stocks or mutual funds and holding them for many years. These assets are not known for volatility, and their past performance indicates positive growth.
The money invested in the market safely could grow significantly over time. Many put their money in the stock market early to have a nest egg when they retire. These investors are not entirely opposed to high-risk investments but would not generally put very much money in their portfolio on such assets.
There are no guarantees about how a stock will perform. In general, investing money for the long term presents the most excellent chance of producing a positive result. Seeking decent returns of 4% to 8% per year over many years could lead to developing a solid nest egg. Imagine amassing a stock portfolio of $300,000 with an average return of 6% per year. When someone retires at age 65 and collects social security, they could supplement their annual budget by withdrawing upwards of 6% per year out of their portfolio and still have $300,000 by the year’s end after withdrawing $18,000 from their portfolio during the year.
These hypothetical investors may withdraw $8,000 annually, allowing $10,000 to continue reinvesting annually. By 70, that would mean an additional $50,000 in the portfolio without including any compounded gains derived from the reinvested $10,000.
Again, stock market outcomes are not guaranteed. The above represents a potential return from an investment portfolio’s successful and conservative management.
That said, there are instances where a company’s growth could be tremendous. Predicting the increase is not always easy, but those who invest while the stock is low and then ride the rewards could discover incredible returns. For example, someone who invested $1,000 or more in Apple 30 years ago would have substantial gains and a massive increase in net worth.
Volatile Trading and Risk
A point about the stock market that bears mentioning is that some may wonder about short-term gains. Buying and selling stocks quickly and taking immediate cash capital gain is certainly possible. For example, if a person invests $10,000 in a stock on a Monday and makes a 9% return by Friday, and the person sells it, they could walk away with a $900 profit. However, there will be tax implications that the person might not consider, as this would be a short-term capital gain with a higher tax rate than a long-term capital gain.
Others may choose to go the route of day trading, which is highly risky. Some may venture into far riskier endeavors, like the predictions market or volatile cryptocurrency.
Trading is not the same as investing. Some new to the market might not realize this. Individuals may have ideas about making big money based on reports of people amassing tremendous amounts through crypto trading or other volatile areas. While someone could direct some of their discretionary income toward these endeavors, they might not be the best strategy for someone who needs to conserve their wealth and net worth. In many ways, these approaches are like gambling.
While there might be other approaches to gaining wealth, a new investor may consider trying to build up their first $100,000 in safe investments in their portfolio. Someone who can save $10,000 a year and invest would have less than 10 years when adding the compound interest into the mix. Others may take longer to build up that $100,000 portfolio, but things could become easier once the $100,000 is in the market in safe investments. The 5% compounded yearly on that hundred thousand dollars could become a tremendous nest egg if the person has the hundred thousand by age 45 and intends to retire at 65.
Final Thoughts
Investors might benefit from educating themselves on the fundamentals of the stock market, defining their goals, and determining their risk tolerance. Expecting too much too soon could lead to rash investment decisions, and rushing into an investment without fully understanding how the vehicle works could also be disastrous.
While many have made tremendous sums in the stock market relatively quickly, those who take a measured, long-term approach may be best poised for success and face less risk. Risk could be acceptable for young persons, but older people hoping to secure their retirement savings may wish to play things more conservatively.
