If you’re reading this, hopefully, you’re somewhat familiar with what stocks are and how the stock market works.
If not, stocks represent shares of a company. Companies sell these shares to people when they go public to source growth.
To make this easier, picture a public company as a pie. This pie is cut up into many small slices, and you purchase (invest) one of those slices. You now have a piece of the pie; you are technically part owner of that company. This means the operations and growth/decline of the company affect you!
The stock market is where you buy, sell, and trade the stock. In this analogy, it’d be a bakery! Except for the baker lets you buy a slice, then sell it back to him or trade for a new slice.
You are always at some element of risk when investing.
Reducing that risk can be done through diversification. In other words, don’t put all of your eggs in one basket.
SINGLE STOCKS
When you invest in single stocks, you are investing in the performance of one company. Or putting your eggs in one basket.
When investors do this, they are usually playing the game of “perfectly” timing the market.
There is too much risk in having your investments rely on the performance of a handful of companies. When you think of investing in single stocks, you need to view it as you would spending money at a casino.
Which is being prepared to lose money.
So, if you do invest in single stocks, then only use money that you are okay with losing.
If you’re okay with throwing away $20 into the single stock market, then go ahead.
Set your limit on the amount of money you’re okay with losing. Whether that be a portion of your miscellaneous fund or if you make a separate budget item for it.
But single stocks need to be viewed as a hobby, not a retirement account. You are only investing in single stocks for fun.
You invest in mutual funds for long-term growth. What’s the difference?
MUTUAL FUNDS
Investing in mutual funds spreads out your investment in several different companies. Mutual funds are created when people pool their money together to buy stocks in different companies.
So, some of the companies in that fund will go up and some will go down, but there is a consistent long-term growth that you can rely on.
Mutual funds are also actively managed by a professional. Rather than relying on yourself after Googling your way to being a “professional” trader.
If you’re going to take the risk of investing, then you should sit down with a professional if you want consistent long-term growth.
There are four types of mutual funds that you should have –
- Growth and income funds
- Growth funds
- Aggressive growth funds
- International funds
If you do this, you will have four baskets – instead of one!
Investing is important, even though there is always some risk involved. Your money won’t keep up with inflation if you just stash it away in your safe or furniture.
So, take the risk of investing, but do it wisely. Focus on the long-term when investing, not the fast and reckless approach. Stocks are a great wealth-building tool, but if NOT done wisely, then they can also cost you a lot of money and progress.
Be wary of the obsessive tendencies that single stocks’ volatility brings out in people. Strive to steward your money well over the long-term, not by betting on a big windfall.
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