Introduction to Investing in the Stock Market - Part 1
How to boost your bottom line, make your money work overtime, and become a financial goddess
I know Beyonce told us that girls run the world but you know she and Jay-Z understand better than most that you need money for true power. A lot of us just have our meager savings sitting in our bank account not doing much. The most you usually get from putting your moolah in a savings account is a piddling 5 percent. You can expect an average rate of return of 12 percent from some medium risk investments in the stock market. To explain what we are doing by investing in stocks, I’d like to tell you about a friend of mine who now runs a successful restaurant selling southern cuisine.
My friend (we’ll call her, Debra) had always really wanted to start a restaurant, but she was a struggling single mother and there was no way that she was going to be able to put together enough green to start a business like that. She didn’t have a ton of money but she did have lots of good friends and close family who supported her dreams. Okay, we all love Debra, but, even more important to this story, we love her double-baked mac and cheese, southern greens, candied yams, peach cobbler, cornbread, and barbecue. We’d all enjoyed her food many times and knew that anyone else who tried her food would also want to have it again and again. So, we were all willing to pitch in to contribute to her business. This wasn’t charity. It was an investment. By contributing to its startup, we all became part owners in her business. Which is really nice now that she’s starting to make a profit because it means that we each get some fraction of those profits, depending on how much we contributed. (Some of us just get free barbecue when we visit the restaurant).
Investing in a company works in a very similar way. Companies, like Debra, raise money by trading ownership in their company for funds. When you purchase a share of stock in that company, you become part owner. For example, take a look at the Walt Disney Company. You could buy one share of stock in Disney, at the time I am writing this, for $110.55 (U.S. dollars). Don’t get too excited though. There are 1.51 billion shares of Disney floating around. So, your one share of stock would be a 1/1.51 billionth stake in the company.
Just in case you wanted to get them to produce the animated version of that fanfiction you just wrote, note that a fraction of ownership in Disney that small won’t really give you any say in what happens at Disney. In fact, brokers (that’s who you buy shares of stock from) won’t usually let you purchase shares of stock in less than 100 share “lots.” It’s kind of like how the ATM won’t let you take less than $20 out, except you are spending money with the brokers and it’s just not worth it to them to put the transaction through unless it’s a full lot of 100 shares. Let’s see then. Hmmmmm, 100 shares of Disney at $110.55/share… that’s $11,055 for one lot. Yikes! Don’t worry, there are other ways to get into investing though, that don’t involve spending the down payment for a house.
One way is to buy shares of companies that are not quite so expensive. There are lots of companies whose stocks are trading for less than $100. For example, let’s look at a few companies in the video game industry. Are you a fan of Call of Duty or Overwatch?
Activision shares are currently selling for $70.98 each. What about mobile gaming? Does it seem like there is always someone playing Farmville on their phone? Mobile game maker, Zynga, is currently a very affordable 3.75/share. And, Gamestop, the video game retailer, is not too expensive at $16.69/share.
Why would you want to have a stake, or part ownership, in a company anyway though, especially if it was going to be such a small fraction? Well, the price of a stock goes up or down depending on how well people believe the company is going to perform in the future. So, if everyone was excited about the next Thor movie coming out and expected this to boost Disney’s profits because it was expected to do very well at the box office, then the price of Disney stock might go up before the movie comes out. If you bought it today at $110.55/share and then shortly before the latest Thor movie comes out it goes up to $125.00/share and you sell at that price (buy low, sell high), then you would have made $15/share. Not that exciting if you only have one share of Disney maybe but let’s say you bought three lots of Zynga (that’s 300 shares) March of last year at $2.75/share?
If you sold your lots at $3.75/share, then you would have made $1/share or $300 total. That’s in just 10 months! That’s an amazing rate of return given that you made $300 from investing only $825 initially.
The down side is at least as big as the upside though as you can also lose money in the same fashion. In November, Zynga was selling for $4.17/share. If you had purchased your three lots of stock at that time then you would be down $126 on your initial investment, about 10 percent. It’s important therefore to know something about the company you are investing in. If you like video games, invest in game companies that make the titles that you’re excited about or who run the stores where you are currently buying your games. Do some research to find out information about what is coming out in the future and invest in the companies that make the titles you are looking forward to purchasing later. If you are buying from them, after all, you are already investing in them financially, without the benefit of being part owner. Make a switch from consumer to intentional investor and watch your financial potential bloom.
Stay tuned until next time when I’ll talk about mutual funds, a relatively low-risk way to start investing and a method of purchasing expensive stocks in companies like Disney or Apple without selling everything you own.