Do the words "stocks," "bonds" and "NASDAQ" sound like a different language? Well, you're not alone.
As a wordsmith in my early 30s with a family, a career and a slew of responsibilities, I've often wondered whether I should learn about stocks. Learning how to invest has always seemed daunting to me and one I've placed in the "maybe one day" list since my college years. To be honest, the stock market app on my phone might as well contain astrophysics equations.
But when the pandemic brought vast uncertainty and a lot of financial stress for people around the world, I felt like the time for a long-term investment plan was upon me. To help translate complex concepts into layman's terms, I spoke to a financial analyst who broke down the basics of the stock market into a practical and surprisingly simple guide.
"Education is such a big piece of the puzzle. It is something you can learn and people should be more knowledgable about. I didn’t learn anything in my high school business class about this. The knowledge gap between the people who know it and who don’t is big one," Rob D'Angelo, CFA told TMRW.
So, let's get to learning!
Cash, stocks and bonds: What does it all mean?!
Cash: Simple, safe and straight to the point
"It sits in the bank. Cash isn’t going to grow at all — it's the only place you can park money and have it be there tomorrow, six months or a year from now," D'Angelo said.
For people who don't make extra savings money on a regular basis or for someone who knows they're going to need to pull out money in the near future (months to a few years), keeping money in the bank is the best option.
Stocks: A long-term investment with a risk
"Stock is ownership in a public company. You buy a share of stock and you are an equity owner in that company," D'Angelo told TMRW.
Equity is all of a company’s assets: cash, the product it sells minus any liabilities, he added.
"You are risking your capital (the money you have earned) by being a shareholder, because if the company goes out of business, your investment goes away with it," D'Angelo said. "On the other side, if a company grows, your investment will also double, triple, quadruple in size."
Compared to keeping cash in the bank or investing in bonds, stocks are the most risky. But they also have the most rewards.
"Look at it as long-term money," D'Angelo told TMRW.
For those who see a surplus every month in their bank account, whether it's $10 or $1,000, and don't need spend it in the immediate future, stocks are a great option. It could be a retirement fund, money for your toddler's college tuition, cash for that trip around the world or money for a big move somewhere warm and tropical when you grow too tired of winter in 20 years.
It's money that you won't see for a long time, but when you do, there's a good chance there'll be more of it.
Bonds: Loan the money and let it grow
Bonds are safer than stocks because they’re a loan. Basically, you take a particular amount of money you've saved for an investment and loan it to a company, then that company makes interest payments back to you twice a year. The loan is for a set time period and the interest rate is fixed. Whether you choose a 10-year bond or a 30-year bond, the company is legally required to pay back the full loan at the end of the agreed upon term, plus the interest incurred.
For example, you could give $1,000 to a big appliance company for a 10-year loan. Every year you make an additional $50 and then in 10 years, you receive your $1,000 back into your bank account on top of what you've earned. If a company you invest stocks in goes bankrupt, you lose all your money. But with bonds, the company is required to pay back their loans (at least at a percentage, depending on legalities and agreed upon terms).
What are the most important things to know before investing?
1. Know your goal and make a plan
"For someone who wants to start investing, you need to figure out what your goal is first. That sets up everything," D'Angelo told TMRW. "Know what outcome you're looking for, then star to peel the onion and build an investment account that’s geared toward reaching that goal. That's going to dictate if should you (invest) some stock, some stock and some cash, or some stock and some bonds. That’s a really good starting point."
D'Angelo recommends finding a financial advisor to help curate a detailed plan that will account for what you want to afford (whether it's a $2,000 vacation a year, a larger car for a growing family, a house, dining out often or a new dog), how much you spend and how much to invest.
If hiring an advisor isn't for you or if you're just trying to take a little money and invest it to get a feel for the market, there is plenty of free financial planning software, such as TD Ameritrade, Fidelity, Charles Schwab, Acorns, Robinhood and Mint.
2. Choose the companies to invest in
"Buy something you're familiar with, that you're interested in, that you trust, that you use. It'll be easier and more enjoyable to stay up on something that company is doing over time, to read about it or sign up for company newsletters," D'Angelo said.
Or if there's a brand you have a good feeling about and do reasonable research, that can work as well. D'Angelo advised pausing before investing in a startup, however, as the risk can be significantly higher.
"A brand new company making money in the future is tough. There are far more companies that fail than actually make it," he said.
3. Be patient
Patience and discipline are huge assets when it comes to investing, according to D'Angelo. Whether you start with a small investment or a big one doesn't make as much of a difference as the time you put into it.
"Be prepared to invest in a company (for) at least five years," D'Angelo said, though he typically believes an ideal investment period to be 20 years or more.
"If you look at the history of stock market (in general, not one company), there’s never been a 20-year period anywhere that stocks have lost money. Pick any day in history, any starting date — a random Sunday in 1856 … look 20 years from that date, the market will always be higher."
Sure, there could be a 10-year period where stocks don’t do well, but if you're patient and ride the wave, chances are it'll turn around.
4. Never put in more money than you're willing to lose
Before any client invests, D'Angelo urges them to have some cash savings to fall back on, especially in unpredictable times like a global pandemic. With that said, if you have a rainy day fund and are ready to grow some long-term money, it's a profitable, sometimes tumultuous ride.
When it comes down to it, never invest more money than you're willing to lose.
"You need to have the gut for it. It’s risky. In the short-term, the money could really do anything — it could go up, down, sideways," D'Angelo told TMRW. "You need to understand that going in and have appropriate expectations."