Since elementary school, students are taught about the stock market from a historical standpoint. They learn about the Great Depression and the significance of Wall Street, but even after all of the school lessons and media coverage, the question for many students still remains—what exactly is the stock market?
Lecturer of Economics Charlie Harrington said that the best way to think of the stock market is to think of it as you would any other market.
“Buyers and sellers interact and prices are set. As in any other market, the price will change if any supply-side factor or demand-side factor changes,” he said.
As complicated as it can seem, the stock market is just a way for individuals to own a part, or share, of a company and earn a profit without starting their own business. People invest a certain amount of money each month into the companies they choose to be a part of and they have the chance of accruing money as those companies grow.
The first step to investing is to decide whether to invest exclusively with the stock market or to work with mutual funds.
To work exclusively with the stock market, it is crucial to open a brokerage account through a bank or brokerage firm, such as Charles Schwabb or Merril Lynch. The broker acts as a liaison between buyers and sellers in the market and they monitor the growth of each company to determine what will bring the greatest profit to the investor.
Mutual funds are professionally-managed programs funded by different shareholders. Each shareholder contributes a certain amount of money and the financial adviser of that program puts the money into stocks, bonds and other investment securities.
Those who choose to solely invest in the stock market tend to have a larger and more diversified investment portfolio, which means that they have invested in a lot of different types of companies. Because students generally have a smaller portfolio, Harrington and Assistant Professor of Finance Jack De Jong agree that it is more beneficial for students to invest in a mutual fund instead because mutual funds require less capital starting out and they do not require a lot of the time or experience needed to make a sound investment.
“So long as you invest long term, over time, everything will appreciate. The best market strategy is to choose a mutual fund that has a good track record,” Harrington said.
Whether an individual chooses to invest exclusively in stocks or to join a mutual fund, they earn money either by earning dividends or by capital gain, which is when stocks are sold at a higher price than originally purchased at. When companies earn a profit, they issue dividends, or a certain amount of money, to each shareholder. The portion that is issued depends on how much the profit is; however, if the company doesn’t make a profit, the shareholder loses money.
“Stock market prices change instantaneously because there is a huge number of people acting on readily-available information simultaneously,” Harrington said. “If you just look at world events, you can pretty much anticipate the direction of the change in price in a particular stock.”
De Jong said that students need to thoroughly understand the terms risk and return and make sure to practice diversification in their investment portfolios. The easiest way to put the terms into perspective is to remember that the bigger the risk leads to the most potential for a return.
Harrington said that younger people are able to take higher risks than their elders because if the companies they invest in fail, then they have a longer period of time to make up the loss.
“If I were a graduating student, I’d be fairly aggressive. You can afford to be a little bit riskier,” he said. “You really need to have a good financial adviser that understands your tolerance for risk, where you are in your life and what your financial goals are.”
When compared to bonds or mutual funds — the other two main types of investments — De Jong said that stocks are risker, but they have potential for more return. If students do choose to invest in stocks, they need to make sure to diversify their portfolio so they “don’t put all of their eggs in one basket.”
By investing in various types of companies, stockholders increase their chances for a high rate of return and also minimize the chances of losing all of their money if a company plunges in the market.
De Jong and Harrington agree that no matter what type of investment is made, it is crucial to stay updated on how stocks are doing in the market.
“What do you know that’s different from what everyone else knows?” De Jong said. “The more students know, the better decisions that they will make.”
According to Harrington, the stock market is a good indicator of what people think about current events and shows how the economy is constantly changing. By paying attention to what is going around the world, people can see how their investments are impacted by the current events and make well-informed decisions as to how successful those investments will be in the future.
Harrington and De Jong both agree that everyone should make some kind of long-term investment.
“Even if you’re not a person who thinks you’ll work in investments or finance, most companies will offer 401k retirement plans where you’re responsible for putting away money for retirement,” De Jong said.
By putting away money for the future, students can ensure that they have enough money saved to have a stable financial future.
“Seek knowledge,” Harrington said. “The more information you have, the better decisions you can make.”
