I love making money while I’m not working, don’t you? While on the beach or on a run or heck, even when I’m sleeping – if I can earn extra cash while doing those things, I consider it a good deal. And ladies, do you know what allows you to do that? Stocks.
I realize stocks normally aren’t on the forefront of any 20-something woman’s brain. I get it. Between trying to pay off debt, schedule that ever diminishing social time with friends, and squeezing in some hours at the gym, the idea of stocks and what they could do for you doesn’t really take priority. And I’m ok with that. I’m uber money-focused, and I’ll admit, I’m not following the market on a day-to-day basis either (and ok, sometimes I’ll go a week or two without it even crossing my brain. Or a month. Oops.)
However, even though investing in stocks doesn’t seem as exciting as investing in, let’s say, that killer dress that will potentially land you your dream job, it has the opportunity to pay off. And in a big way. Let’s say I had been psychic and invested in Apple when I graduated high school back in 2005. At that time, a single share of Apple stock could be purchased for $4.96. Today, one of those shares is worth $128.47, meaning that if I would have invested $10,000 10 years ago, I would have almost $260,000 in my pocket now. And that’s a lot of champagne. And shoes. And trips to Europe.
Now, let’s slow down for a second and get into exactly what a stock is. When a company initially opens its doors, it usually does so as a private company, meaning that the general public isn’t able to invest in the business. An example of this is that yoga studio your aunt started or the new craft brewery you’ve been hitting up on Friday nights – normally, the people who started the company continue to own it themselves or pass it down to their children; however, when the owners of that business decide to jump ship and allow the average Joe to invest in it (and there are many reasons to do so, but we’re not going into that here), they will offer their stock to the public in what is known as an initial public offering (also known as an “IPO”). This means that they are now able to list a certain amount of shares on a stock exchange, and you, me, and all of the good people of the world are able to buy these shares and essentially own part of their business.
Now, let’s talk about what you’re really interested in: how stocks can make you money. Even if you’re still wary of investing, keep reading – knowing this will at least make you sound intelligent at a business dinner…or when trying to impress your financial-savvy mother-in-law ;)
How to Make Money through Stocks
There are two ways to make money in stocks: stock appreciation or dividends.
Stock appreciation is how so many people made money through Microsoft, Wal-Mart, and Berkshire Hathaway (which is Warren Buffet’s company – and if you don’t know who he is, crawl out from that rock you live under and look him up). Basically, you earn money this way when your stock price is higher when you sell it than when you initially bought it. This increase in price can happen one of two ways.
1) Company Value
Many companies start out as caterpillars that bloom into beautiful (and profitable) butterflies. It’s like that girl in high school that no one knew but all of a sudden got boobs and became popular – no one cared before but now everyone wants to have a piece of her pie.
A great example of this in the stock market world? Apple. They were chugging along under the radar for awhile until they introduced the iPod. Then, the world got Apple-crazy, and now they’re bringing in more money as a company than they know what to do with. The market’s perception of the value of their company skyrocketed, which consequently made their stock price go through the roof. And who benefited the most from this? Yep, those investors who held Apple’s stock while they were still sitting in Microsoft’s shadow. Good for you, guys. Good for you.
2) Market Timing
First, let’s explain the two different types of markets: bull and bear. You’re probably thinking the same thing I was when I first heard these: “Who the F came up with these names?” However, these terms reflect how each animal attacks, which in turn describes which direction (up or down) the stock market is going.
For instance, when bulls fight, they start low and swing their horns up to attack, which is why you always see their victims being thrown up in the air. Thus, in a bull market, stock prices are sitting at lower levels and are beginning to increase across the board – you start low and end high (this is good). On the other hand, when bears fight, they begin by standing tall and then tackling their victim to the ground. Thus, in a bear market, stocks prices are at high levels and are starting to decrease – you start high and end low (this is bad).
Now, if you buy a stock when market levels are low (AKA during a bull market), you can benefit by the market as a whole taking an upswing. However, you can also get bit in the butt if you buy when it’s high (AKA during a bear market). It’s all about timing using this method.
Market swings usually occur when the overall economic outlook changes. For instance, in the recession we experienced a few years ago, most stocks on the market decreased in price – nothing could have changed with the company they were invested in, but because people were scared we were heading towards another depression, they wanted to get their money out of the market as fast as possible. However, as bad as the outlook seemed, this was a great time to buy because many stocks were undervalued. Once the market corrected itself (and it did, although it took a few years), prices rose and people made some decent money on stocks they bought while they were trading at that lower price. Moral of the story: if you can catch the market during these low periods, then you will more than likely earn a nice return on your investment.
Fancy word for a not-so-fancy concept. A dividend is money the company pays back to its shareholders as a way to say, “Thank you for doing business with us.” Companies usually only issue dividends when they have loads of excess cash sitting in their bank accounts and cannot or do not want to invest it back into the company.
You can receive dividends in multiple ways – some individuals receive it as straight cash (ok, not actual dollar bills but a check or whatnot) while others (like yours truly) choose to take that money and buy additional shares. This is called dividend reinvestment, and if you elect to do this initially within your investment account, it will automatically do it for you each time a dividend is paid out (meaning you don’t even have to worry about it – holla!).
Stocks that pay dividends are great for individuals closer to retirement age because they a) are usually paid out by more stable companies, meaning they won’t have to worry about losing a lot of money related to stock price dips and b) provide a stream of income coming into their bank account each year. However, don’t let that deter you young folks from investing in stocks that are known for their dividends. It’s a great way to diversify and keep some stability in your investments – I have some in my portfolio! Just make sure that you choose to reinvest any dividends you do earn. You more than likely don’t need the small amount of cash these will initially generate, and it’ll allow you to gain more shares and increase your investment account.
Ok, I just read over all that information, and ladies, did we cover a lot. Good news, though, is that now you are an almost-but-not-quite stock expert. Ok, maybe not expert, but at least now you won’t have to go out and buy “Stocks for Dummies.”
I realize this is a lot to take in, and while I could explain each of these at much deeper levels, I thought I’d try to just skim the surface here (and I know it was still probably a little overwhelming). However, if you have any questions whatsoever about stocks or the market in general, feel free to ask in the comments section below or shoot me an email. Lesson 1 of your investing education is complete, ladies!