Investing is defined as, “the outlay of money usually for income or profit.” The idea behind investing? Put your money to work for you, in something you believe will increase in value over time.
As usual, the devil is in the details. Where do you invest? How much? How often? There are some gender differences, too. Men are generally more confident about investing, while women are more goal-directed and trade less. Women tend to keep 10% more of their savings in cash than our male counterparts. Millennial women report a lower level of financial comfort. On average, we are less likely to feel “in control” or “confident” about our financial future. And, women generally have a smaller total invested when we retire - because we earn less. Increasing your income will help close that gap.
I believe we can jump many of those gender-based investing barriers by improving our understanding. So, let’s get started and tackle the basics together.
When people talk about investing in “the market,” what are they referring to? Today’s markets are largely exchanges - like the New York Stock Exchange (NYSE) - that allow us to buy and sell investments to others. You’ve seen photos of business executives and celebrities “ringing the bell” to open the NYSE, but it’s not the only market; others include the NASDAQ, London Stock Exchange, and many others.
Okay, we’ve figured out markets...but what can we invest IN? Just like when you go shopping, you have a lot of options. We’ll start with individual stocks.
What the heck is a stock? Buying stock is like purchasing a little slice of a company. Say you buy stock in consumer goods company P&G (manufacturer of Tide, Crest, Dawn, Tampax, and many other household names); that stock costs $86.22 per share at the time of this writing. If you buy that share, you are betting that P&G will continue to grow and make money. P&G uses your $86.22 to invest in its business; open new locations, fund new products, hire new staff. So, it's a win-win.
Stocks make money for investors in two basic ways. First, the company may perform well and create profits (taking in more money than it spends). In this case, P&G may choose to pay stockholders dividends from those profits. Dividends are a financial “thank you” for investing in the company. In May 2017, P&G paid stockholders 69 cents for every share they owned. (Dividend payments are announced as part of their quarterly earnings reports, where they summarize financial performance for stockholders.)
Second, you can make money by selling your stock to someone else. Then, you profit (or lose) the difference. In our example, you bought P&G at $86.22. Over time, if the company continues to do well, more investors will want to buy that stock. This can push the price higher. If the stock hits $90, and you sell, you’d earn $3.78 for each share you owned. Very popular stocks can be like a Hermès Birkin bag - very expensive because they are limited in quantity and hard to get.
A caution: if you are buying stocks one by one, it is very difficult to consistently make money. Think about it; as an individual investor, you need to be educated enough to buy only the stocks that will continue to pay dividends OR buy (and sell) the right stocks at the right time, when they increase in price. And you’re competing with everyone else who watches the market - including professionals. One of the money mistakes I made was trying my hand at purchasing individual stocks and I’ve shared how that worked out - disastrously - for me. There are over half a million companies you can invest in on public exchanges. How will we pick the right ones to buy stock in?
I have great news for you. We don't have to. There’s a better way to invest in the market by purchasing groups of stocks in mutual funds and ETFs (we’ll explore mutual funds next). Buying groups of stocks won’t give you an amazing story like someone who invested in Google at $85 per share (now worth $937.50); nor will it wipe out all your investments like Pets.com (the company went bankrupt less than 300 days after starting to sell its stock).
Has this introduction to markets and stocks helped you? What other questions do you have?
xoxo, Ms. Financier