The Vault, May 2011: Who cares about shares? Most people put at least some of their retirement savings in stocks, and some folks make careers out of trading shares. The stock market is riskier than some kinds of investments, but returns can be greater, as well–especially over the long term. Where can a Biz Kid make sense of it all? Right here in The Vault!
Disclaimer
We have to say it: we’re not giving you advice about whether or how to invest your money—you should go to a licensed professional for that! Share it! Share The Vault with a friend! Click on the handy icons in the upper right to email it or share it on Facebook. Video of the MonthMeet Jeff, who started painting and investing at a young age. He talks about finding a mentor and his approach to investing, and gives some sage advice about investing for young people: http://www.youtube.com/watch?v=cVmg99md4U0 Ring around the money Every day, the New York Stock Exchange (NYSE) is opened and closed by the official ringing of a real bell. Former big bell ringers include Mickey Mouse, Darth Vader, and Mr. Potato Head, just to name a few. Oh, and they do let real people do it too— like the Biz Kid$ crew did in April!
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What is stock, and what is the stock market? Companies need to raise money (called “capital”) to hire people, buy equipment, and so on. They can get a loan from a bank, or they can issue stock (also called “shares”). When you buy stock in a company, you own a piece of that company. That makes you a “shareholder.” A stock market is where stocks are bought and sold. Although stock markets started as physical places where people bought and sold stock certificates, practically all trading today is electronic. There are markets all over the world—from Spain to Tokyo—and you can trade in almost any of them. The NYSE is the largest by far, valued at over $15 trillion. What sets a stock price? Stock prices are based on supply and demand. If lots of people want a stock because a company is growing, the price will go up. If a company is struggling, lots of people will try to sell their stock, and the price will go down. You only make or lose money when you actually sell a stock that you own, unless a company goes out of business, in which case your shares are worth nothing!
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Risk and reward Stocks can provide a better return than less risky investments like bonds, but you can also lose money. The value of stocks is tied to lots of unpredictable things you can’t control such as the economy, politics, world events, and even the environment. It pays to do your research and keep a cool head. Have a strategyPeople have different approaches to stock trading. Some people buy and sell stocks daily hoping to make a quick profit. Others “buy and hold” stocks that are likely to grow over the long term and ignore day-to-day ups and downs. One of the world’s most successful investors, Warren Buffett, says he only buys stock in companies that he understands. That’s good advice for a beginning investor!Dividends Some stocks pay dividends. Dividends are a share of the company’s profits paid to shareholders. If a company pays an annual dividend of $1.00 per share and you have 100 shares, you’d get $100. Companies have to be profitable to pay dividends, so they are usually older, more stable companies—which can be good for long-term investing.
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Diversify! Ever heard the phrase, “don’t put all your eggs in one basket?” The same thing is true with investing. If you invest all your money in candy companies and the price of sugar goes through the roof, you’re in trouble. To “diversify” means to invest in lots of different companies and industries to spread out your risk. You can instantly diversify by investing in mutual funds or index funds, which collect many stocks together in one fund. Just make sure you know how much the investment company is charging you to manage the fund. Learn from experience You can try investing using real stock market data without actually risking real dollars with We Seed: http://www.weseed.com/markets/love/kids. Or, have your parents open an investment account for you. ShareBuilder ( http://www.sharebuilder.com) is designed for beginning investors.
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