Bruin Bucks: Understanding the basics of investing, navigating the stock market
(Nghi Nguyen/Daily Bruin)
March 1, 2021 4:14 p.m.
It’s no secret that finances are often left to a student’s own devices: stocks, bonds, investing, assets – what do all these terms mean? Bruin Bucks tackles the confusing parts of personal finance they don’t teach you in school.
Most of us have heard of the fast-paced world of investing — Wall Street, Robinhood, and of course, GameStop. But how many of us actually understand the ins and outs of investing?
A survey conducted by Gallup reported that, most likely because of the 2008 stock market crash, the percentage of Americans younger than 35 investing in 2006-2007 dropped from 52% to 37% in 2017-2018.
No matter how interested in investing we may be, not all of us have actually been provided with the resources necessary to navigate the stock market. So let’s start with the basics.
Economics professor Pierre-Olivier Weill said we may already be investing without even realizing it.
“(Investing) goes from taking a student loan (to) taking a mortgage to saving to retirement,” Weill said. “And also, it’s about picking, saving and borrowing instruments in order to manage your wealth and consumption.”
To begin investing, it is essential to create an investment account and understand your investment options.
Start with the foundation: stocks. Stocks, or equities, are a percentage of ownership in a company that you can purchase through a share price.
Bonds are loans to a company or the government with the promise that they will pay you back in a certain number of years — making them less risky but also less gainful.
Another type of investment option is called a mutual fund. Instead of choosing just one individual stock or bond, investors can purchase a collection in one swoop, which is also less risky.
Lastly, exchange-traded funds are bundles of investments similar to mutual funds, but they are traded like stocks and bought at share prices. The lower minimum price makes ETFs ideal for new investors with small budgets.
If you wish to begin buying stocks, the easiest way to go about it is by utilizing an online brokerage.
A brokerage has the ability to facilitate the transactions between buyers and sellers. Nowadays, many people use brokerage apps.
According to The Balance, the best overall stock trading app is TD Ameritrade Mobile – however, Fidelity is rated as the best app for beginning investors.
When starting to invest, it is important to consider what short-term or long-term goals you may have. Planning to invest in retirement earlier means a greater return in the future.
For retirement, you can either find yourself with a 401(k) plan through your employer or an Roth Individual Retirement Account, which allows you to contribute to the fund at any time as long as you have income.
Investing may seem like a daunting process at first – Weill said he recommends being cautious and studying different financial instruments and investment strategies before making trades.
“I am not about timing the markets or choosing a particular stock, but instead about buying and holding a broadly diversified portfolio,” Weill said.
Having a diverse portfolio can help reduce investment risk, according to The Balance. One way to diversify your portfolio is through index funds.
Index funds are a type of mutual fund or ETF with a portfolio made to track the components of a financial market index.
Total market index funds, such as the S&P 500, offer investors wide market exposure. Index funds are popular for being relatively low risk and low priced.
But before you start jumping into index funds, it is important to set up a plan of what you want to invest in and when.
Sam Poursafar, a second-year political science student, said he believes that students should get started early with investing because of compound interest.
“I would want to start investing as soon as possible just because of the concept of compound interest. Compound interest (makes) your returns … much greater, the longer you’re investing,” Poursafar said.
Compound interest is the interest on a loan or deposit that is determined based on both the initial amount of money and the accumulated interest from previous periods.
As much as there is to be gained by the stock market, there is an equal amount to be lost.
William Zame, a professor of economics, said no one can time the market, so it may be wiser to invest at whatever time one feels is right.
“Unless you think you can time the market, so as to miss all the bad days and hit the good days, you’re just as likely to do worse by timing the market than you are to do better,” Zame said.
The pandemic provided an interesting lesson on timing.
According to Wall Street Journal, in spring 2020, the Dow Jones Industrial Average and S&P 500 plunged about 35% within six weeks – but in September, the Dow was near its all-time high, while the S&P 500 stood at its most robust five-month rally in more than 80 years.
The market goes through periods of ups and downs, but that doesn’t mean that people should pull all their money out of the market immediately, especially if they are college students who have goals of long-term investing. The risk is sometimes not as great as the reward, Zame said.
If students are interested in learning more about investing and finance, there are several different ways for them to become involved in clubs and organizations that specialize in investing.
Poursafar started the Business Law and Investing Society, which he created for all students from any major or range of experience to join and learn more about business law and finance.
“We really want to give a free range of benefits to all our members to learn more about something they’re interested in, (which) in this case (is) investing,” Poursafar said.
Rishi Kheni, a second-year economics and political science student said that gaining experience is important in investing.
“I think it’s really important to read first, and then after you’ve done your research … to start putting a little bit of money in and then start increasing your amount,” Kheni said. “I think it’s really important just to start.”