A recent survey found that 52% of Americans are not investing any money in the stock market. This means that they are not buying stocks or mutual funds, or investing anything via a 401(k). Of those who were surveyed and said they did not invest, 53% said it was because they did not have enough money to do so, but more interestingly, 21% gave a mistrust of stock brokers and financial advisors as their reason.
While a healthy dose of fear may shield you from potential losses, it can also cause people to miss out on money making opportunities. Where does this fear come from?
Usually, the main reason that people may feel rather hesitant to become involved with the stock market is that it is all so confusing. When you open a newspaper and see that the Dow has risen or fallen, you may pass over it without thinking exactly because it is just a number that seems to change every day. The effect that it can have on your life may seem rather abstract at times. The proliferation of acronyms does not help when you first set out to understand the stock market itself.
What kinds of people succeed as traders?
The sort of people who prosper as traders can contribute to the perception that it is not something for regular people. A recent interview with American chess grandmaster Hikaru Nakamura revealed that besides being in the top ten players in the world, he also likes to trade on the markets. He suggests that some of the same skills that have made in an elite chess player help him with investing too.
However, you do not need to be able to calculate twenty or thirty move variations to make money. The stock market is not as complicated as you may think. Here is a guide to some of the basic principles:
Buy low, sell high
At its simplest, the way to make money trading stocks is to ‘buy low, sell high’. People do this every day because the stock market changes every day. The people that you see looking at computers screens with graphs and numbers and then screaming at the New York stock exchange are so studious and then so animated exactly because they are trying to figure out which stocks are likely to increase in price soon.
You would then buy them, say at $40 a share, and when they reach $50 for example, you could sell and make a profit. Of course, the more shares that you buy, the more $10 profits you’ll make. So-called day traders will try to take advantage of the shifts in the stock market to make a profit but others, like Chris Sacca, are venture capitalists.
He retired recently but he managed to become a billionaire by investing money in companies that he anticipated would become immensely successful. He succeeded in no small part because he had the vision to know that companies like Twitter and Uber would become as ubiquitous as they are today. He may have only invested a little money in the beginning but it produced an incredible return.
How making money works with stocks
The actual mechanics of making money from stocks is quite simple. If you are a stockholder of a company, they will pay you dividends which are a share of the profits each quarter relative to how many stocks you hold. If you have an investment portfolio that is diversified, you can make lots of money by just letting your investments pay for themselves.
The amount that you make depends on your yield, which refers to the percentage that you get back relative to the value of your investment. For instance, if you have a $100 stock and you get paid an annual dividend of $5, your yield is 5%.
What can you do about the risks in investing in stocks?
However, the stock market is not always as generous as some investors make it seem. There is always a great deal of risk involved. Some traders will try to handicap this risk by doing something like short-selling. This practice is looked upon as rather unreputable in some circles but it is perfectly legal. Rather than hoping that the price of your stocks will rise, short-sellers hopes that it falls. They borrow stocks from brokerage firms and sell them when they are high, at $500 for instance. When the price falls, to $450 for example, they buy them for the reduced price and return them to the brokerage firm. The $50 difference is their profit. This is exceptionally risky because if the stock price stays the same or increases, they will not make a profit at all and in the event that they have to sell the stocks, they will incur a loss.
What are some safe options for stock investors?
If you want to start your own portfolio and become a trader, you could start investing money in high-risk stocks because they represent the greatest potential returns, but many people like to start out slow and make sure they have a good foundation first. You could invest in blue chip stocks, which are companies who have a national reputation for reliability. They are unlikely to ever become bankrupt, but they will not give your dividends of 200% either.
Another option is to invest in low risk, high-yield MLPs, which are master limited partnerships. They are companies which mostly deal with essentials like energy. Since every home and business needs electricity and gas, these companies are a pretty good bet (you can find out more here: www.Oilandenergyinvestor.com/special-reports-video/the-three-best-low-risk-high-yield-mlps/). One thing that you should definitely consider when building your portfolio is how diverse it is. If you invest in many different industries, a dip in one is not going to ruin you. Famous, supposedly reputable companies can make decisions that negatively affect their stock price (such as American Airlines, which recently gave its staff a pay rise and saw is stock price fall). If you invest in lots of different companies, you can somewhat insulate yourself from any one of them having a bad quarter.
Conclusion
Investing in the stock market is always a risk, and you could end up losing lots of money, so if you do decide to take the plunge, you should do so carefully. While 21% of people do not trust financial advisors, they know what they are talking about, and if you take their advice and compare it against your own understanding, you can make the best decisions for you.
