Building wealth is about more than just working hard. Yes, working hard and succeeding in your career is important — but the wealthiest among us know that becoming truly successful isn’t something you can do just by collecting a salary. What you do with your money matters, too, and what you should do with it is invest it.
Investing gives you the chance to grow your nest egg into a fortune. But investing can be confusing to a lot of folks, which may be part of the reason that only about half of all Americans own any stock.
Investing in stocks can mean everything from using spare cash in a passive investing strategy to going all-out day trading penny stocks. Here’s what you need to know about stocks.
Investing 101: Basic growth for passive investors
When you save money, you’re building a nest egg for your future. But saving alone isn’t enough. Thanks to inflation, the dollars that you save today will be worth less than they are now by the time you retire. So what can you do?
You need to find a way to beat inflation — a way to get more interest on your money than you would lose because the reduced value of each dollar and cent. A savings account — not only a checking account — is a start, but the real power comes from investing.
The stock market tends to increase in value over time, which means that cautious and beginning investors can do pretty well by simply investing in index funds and large, low-risk (and low-reward, of course) “blue chip” stocks. A “buy and hold” strategy is a good beginning move for investors: Just get some stock and hold onto it, trusting the market to go up over time.
Dirty details about stocks
Of course, stocks aren’t quite as simple as we just made them sound. They reflect the market’s opinion of the value of a given company. That assessment can go up and down for individual stocks, and the entire market can fluctuate, too.
Buy-and-hold investors trust the market to go up in the long term and resign themselves to simply weathering market downturns. More aggressive investors, however, will try to time their moves to ride big market booms and avoid downturns. They’ll also pick out individual stocks that they believe in.
Investors can even “short” stocks that they don’t believe in. Shorting involves promising to sell stocks you don’t own for a given price. If the stock price drops, you can snap it up for less and sell it right away for the (higher) agreed-upon price. That’s an instant profit. Of course, if the stock goes up, you’ll have to lose money to complete the agreement.
Big risks and big rewards
Serious investors may even dabble in so-called “penny stocks.” Penny stocks are low-priced stocks that, because of their small size and low value, can be extremely volatile. Because risk and reward are tied together in the stock market, the opportunities in penny stocks can be huge.
There are dangers, too, of course, which is why you’ll find that investors are more likely to be day trading penny stocks than buying and holding them in passive accounts. You need to know your stuff and be active to make cash in penny stocks!
But that’s precisely the point, of course. The stock market affords different opportunities to different people. If stocks aren’t your thing, a financial adviser can help you set up a balanced portfolio for slow and steady growth. But if a more aggressive approach suits you, you can and should consider learning more and perhaps even becoming a day trader. Whatever you choose, good luck!