What is the stock market and why should you care?

If you’re a good old-fashioned avocado toast eating, diamond market killing, entitled millennial there’s probably nothing that feels *less* relevant to your life than the stock market. I get it – it’s hard to get excited about stuffy bankers complaining that they only made $100,000.00 on this past week’s trades. As a finance blogger though, my biggest pet peeve is know-it-all financial professionals who get up on their high horses who need to feel superior by badly explaining something simple. Scaring away new investors is not just rude but a really mean way to boost your own ego.

For all the above reasons and more I get that you may believe that the stock market is boring and irrelevant, but…

That’s where you’re wrong, kiddo.

Not only does the stock market factor heavily into just about every financial thing that happens to you, if you get to know it, it can be like the world’s most interesting soap opera similar to Days of Our Lives or the NFL. Before you can care, though, you need to understand it. That’s why I’ve put together this guide explaining what the stock market is, why it affects you, and how to start investing without being scammed.

What is the stock market?

Investopedia has the most succinct and accurate definition of ‘stock market’ that I’ve ever seen, which I’m going to quote here:

The stock market refers to the collection of markets and exchanges where the issuing and trading of equities (stocks of publicly held companies), bonds and other sorts of securities takes place, either through formal exchanges or over-the-counter markets.

Let’s break that down a little bit, as raw definitions can be a teeny bit dry. To understand what a stock market is, we should probably first talk about what a stock is.

When a company issues ‘stock’ they are selling shares of their company, which represent a little piece of ownership. Companies sell shares to raise money, and stockholders buy shares hoping that the value of the company will go up and increase the share price. The more the company is worth, the more being a partial owner is worth.

The stock market is also made up of bonds, equities, and other funds that are bought and sold. It has the name ‘stock market’ because these used to be confined to individual places. Remember those movies where hordes of people would run around waving fistfuls of paper and screaming BUY SELL BUY SELL? Those were the markets where buying and selling stocks took place. Now, the term has stuck, but a lot of the action takes place online through firms or apps.

With how many companies in the world there are, it would be really silly to buy and sell all of them in just one place – reading through the reports alone would take a hundred years! Instead, the stock market is broken down into a few distinct indexes that track the 7,500+ stocks that are publicly traded every day such as the S&P 500, NASDAQ, Dow 30, Smallcap 2,000, and more. The important thing to know about these is that they’re just a way of organizing different companies into categories for easier buying and selling.

Why should you care?

Can I assume that you’re planning on retiring someday? If so, yeah, the stock market matters big time. Any sort of retirement account is going to be made of a mix of stocks/bonds, and it’s up to you to understand them well enough not to get scammed by a predatory broker. If you have any sort of retirement account through your work or University as well, it’s made up at least partly with funds from the stock market.

Beyond retirement, the stock market is a pretty accurate snapshot of the world’s economy. Understanding stocks and the Dow Jones average will give you a leg up on predicting housing prices, employment levels, and more. Even if you aren’t retiring it’s important to know whether the economy is doing well or not, so you can make plans for things like unemployment and buying a house. It’s hard to be surprised by layoffs when you’ve been following your company’s stock history, for example.

Finally, you should get a basic financial education in the stock market if for no other reason than to protect against scammers.

“But wait,” you say, “I’m really smart. I would never fall for a scam.”

That’s probably true. You read my blog, which makes you smarter than the average person. Your parents or grandparents, however, do not. You knowing when a bullshit artist is trying to drain your grandparent’s retirement account for a scam could make all the difference in the lives of you and your family.

What should my first steps be?

Before you even begin entertaining the idea of investing in the stock market, the first thing you need to do is pay down any significant debt you have. I realize that managing a high-interest credit card debt or student loan repayment is not as sexy as checking on your portfolio, but it is way more important not to be drowning in debt than it is to be investing. I say this not just because it’s practical, but because the stress of being significantly in debt will lead you to make really rash decisions trying to get that money back. Stress like that makes people do things like sell the second their stocks dip a little or take out payday loans to buy more shares.

Not that *I* the *really smart* *finance blogger* would EVER be caught in the payday loan cycle until I was 24 years old and realized that the interest was eating me alive, that’s something that other people do.

(In case you couldn’t tell, I totally was – and if that is you, I have a great post here on how to make money quickly in ways that don’t involve sketchy loan places).

Let’s assume, however, that you do have your debt under control. First, I’d like you to go back in time and give 24 year old Liz a cheeky slap for not being as smart as you. Once that’s handled, here’s how you get started investing!

How much money do I need?

Not as much as you might think, actually. Most institutions will want anywhere between $1,000.00 and $5,000.00 to start investing but will often waive that with an automatic monthly transfer of $100.00 or less. There are also a lot of awesome apps that will let you begin investing with a small amount such as Stash Invest and Acorn.

Do I really need a full-service broker?

That really depends on your goals. If you want to slowly build a fund for retirement or make a simple portfolio, you can probably do that yourself or with very little assistance. If you’re looking to make $40,000.00 a year from your portfolio alone eventually, that’s likely worth going in for a consultation. Either way getting yourself a good financial education is the first step. The more you know and all that.

Aren’t there a lot of scams out there?

Yes. The world is filled with scammers, who prey on ignorance and delusion. We’re tackling the ignorance here, but people are still prone to all sorts of fallacies that make them targets for scummy people. I have two pieces of advice for you:

DO YOUR RESEARCH

The best thing you can do to protect against scammers is read, read, read, read, read. I would recommend that at a bare minimum you google any company you’re considering investing with and ‘scam’ to get an idea of their legitimacy. The more well-informed you are about how stocks work the harder you’ll be to fool.

THERE IS NO GETTING RICH QUICK

Everyone wakes up and wishes that they’ll win the lottery, sail off to Fiji, and drink champagne on a yacht the rest of their days.

If that sounds oddly specific, you can thank the rich kids of Instagram photos depicting exactly that.

Still, one of the most common mistakes new investors make is thinking of the stock market like it’s the lottery. The worst investment strategy I can think of is betting all your money on one surefire stock that your buddy swears is GUARANTEED to go up 1800% in the next week! Act now! The price is going to go up and you’ll get rich!

This is called a ‘pump and dump’ scam. The worst people on the planet send emails telling you that this obscure stock is guaranteed to go up in price like crazy to get people interested in buying it. Their targets all buy this stock artificially inflating its price, and then the scammers sell at that high price. The market adjusts, and their targets are left with a large quantity of worthless stock that sent the scammer to Fiji.

I’d like to leave you with this original Liz Woodard quote on the stock market:

Whenever someone promises you a sure thing, the only sure thing is that they’ll be the only ones making money.

If you remember that, you’ll be fine.

Do you have any stock recommendations for me?

No. Stock picking is a really shitty investment strategy unless you’re a full-fledged broker with years of investment knowledge/experience. If that is you, by the way, leave a comment and let me know what brought you to this page. Besides my good looks and ladylike demeanor, I mean.

What should my first steps be?

In case I haven’t made it clear, I really really really don’t think that anyone should pick individual stocks unless they do it for a living. However, there are a lot of things that you not only can do, but should be doing now. I call my patented system BRICK.

B – Budget. Figure out how much money you’re putting each month toward investing. Whether you’re playing with $1,000.00 a month in cash or just getting started setting $5.00 a month in an account for a deposit, taking that first step is the important part.

R – Research. Head over to Wealthfront and take their investment risk calculator to get an idea of what your portfolio could look like. Look up whether you prefer index funds, lifecycle funds, stocks, bonds, or a mixture of all of them. Decide if you want to invest passively with an app or invest in a set and forget it IRA with your bank. Read reviews for services, brokers, companies. If it interests you even remotely, research it.

Personally I recommend that you open up a Roth IRA with a monthly transfer of $100.00 at a bank like Charles Schwab or snap up a Vanguard index fund, but I heavily encourage you to explore all possibilities. Remember what I said before, though… anybody that claims they’ll make you a millionaire overnight is taking advantage and should not be trusted with your hard earned money.

I – Invest. Now that you’ve got an idea of what you’d like to do in mind, take the plunge and commit to your plan.

C – Check. Set reminders on your phone for one week, one month, and two months to see if you’re meeting your goals! Even if that goal is just put $10.00 a week into a savings account earmarked for investing, consistently doing that is something to celebrate.

K – Kind. Be kind to yourself if you made a mistake, or if you aren’t making as much progress as you thought. If you got started at all and have been making a real effort, you should be proud of yourself. I’m proud of you.

Is that really all there is to it?

Yep! Getting started investing and understanding the stock market is not as confusing or scary as you might have thought. Forget the idea of needing $10,000.00 and a really fancy portfolio to be a ‘real investor’ or whatever that means. All you need is $5.00, a little common sense, and a desire to make a better financial future for yourself.

Th-th-th-that’s all, folks. Thanks for reading, I hope you enjoyed this ride we took together as much as I did! Check out the rest of my blog for more juicy finance and real estate content, and leave me a comment letting me know if this helped you in any way.

Yours,

Liz

Services | Samples | Hire Me

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s