I know this is not one of our typical posts about behavioral economics, but we wanted to address a key concept we feel has been getting overlooked: investing.
Investing has always been a desirable path, as many dream of "outwitting" the market to make millions of dollars in profit. I am glad to say that as of recently, many kids and preteens have started to become more familiar with investing. Whether from Khan Academy, Young Investors Society, or just through trial and error, any type of exposure with investing will benefit kids in the long-run. Our goal for this post is to introduce the concept of investing to those who are unfamiliar with it. So without further ado, let's get started.
We Are All Investors
As the title of this blog suggests, there are very few limitations on who can be an investor. If you are unfamiliar with the term, essentially an investor is someone who invests their capital, money, or resources into something with the hope that they will get a return from it.
In an essence, the entire world runs on buyers and sellers. Buyers and sellers are everywhere, even at the most basic level of reading this article. Here on Beyond Economics, we strive to give you information, whereas you are exchanging that with the time in your day. You could spend as long as you want reading this blog page, or you could read it until you get enough value from it then move onto something else. That is basically what investing in the stock market is. Essentially, you buy shares of a company, and you would sell it when you make enough profit. You could hold onto that share for as long as you like, as there is nothing stopping you from doing so.
Two Essential Questions
In order to build wealth, it is beneficial to focus on two fundamental questions:
Are you able to save each year? How?
When you save, where do you put the money?
These questions are a great place to start for anyone wishing to get into investing.
First, a person's ability to save is dependent on many different factors, like income, cost of living, expenses, among many others. This can affect how much money you have available to you to invest, and in turn will directly affect how much profit you can potentially make with that investment. So, in order to maximize your returns nonetheless, you will need to be strategic about the companies that you choose to invest in.
Next, figuring out what sort of method you can use to store your money is a wise choice as well. There is a huge difference between buying the stock of a company and putting your money into real estate, so the method that you choose to store your money would vary depending on your investment goals.
Does It Matter Where You Put Your Money?
Speaking of methods of investing, it matters greatly on where you put your money. It is so significant, it makes all the difference in the world. In fact, the more money that you can put in the stock market early, the more the magnifying effect of compound interest or compounding can work in your favor. Compound interest is a very powerful tool that can be used to maximize profits, with Albert Einstein calling it compound interest the "eighth wonder of the world".
Compounding can work wonders within the stock market, especially if you are strategic with your investments. For example, you can reinvest the profit that you make from your stocks back into those stocks. This earned interest is added back into your principal balance, which then earns more interest.
Thus starts a cycle of compounding, with every increase in profits compounding over and over. The significance of compounding is not emphasized enough, as it essentially is allowing you to earn more profits while keeping your personal investments of capital to a minimum. If you reap big profits, those can be maximized, and if you end up losing all of your profits, there is not as much of a blow to your wallet. The longer you stay invested, the more you benefit from compound interest. Compound interest pays returns on both the amount invested and all previous returns, making it a powerful tool for you to utilize.
How to Get Started With the Stock Market
It is quite easy to get involved with the stock market. As a kid reading this blog page, you can set up a custodial account with your bank or brokerage and you can start trading in the stock market. If you are an adult, then you can set up an account by yourself.
Have fun investing and I'll see you on the next post!
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