I think most of us heard about the story about the tortoise and the hare when we were kid.
Believe it or not, you can learn about investing from this little tale.
There’s a fast and reckless way to approach buying stocks (the hare) and a slow and steady way (the tortoise).
I bet you can guess which one I recommend.
Yes the tortoise.
I want you to win this race, no matter how long it takes!
Stocks are a powerful wealth-building tool, but they can also delay your progress and cost you a lot of money and heartache.
Let’s jump into the details.
What are stocks? And how do they work?
Stocks represent shares of a company.
When a company goes public, they sell these small shares to people in order to fund growth.
Buying stocks is one of the most common investment tools.
Over time, the value of the stock will (hopefully) grow and produce a return on your initial investment.
The value of any given stock is tied to the performance of the company and how it is perceived by consumers.
Because of that, some stocks are more volatile than others, meaning that their price rises and falls quickly.
Buying stocks always carries risk.
You could lose all the money you invested.
This doesn’t mean you shouldn’t invest, but it does mean that you should invest the right way and never take on unnecessary risk.
All stocks are shares of a company, but they can be packaged and sold differently to people who want to invest.
Buying single stock gives you ownership in a specific company.
But they’re extremely risky, if you pick one single stock.
What is the alternative?
Exchange Traded Funds:
Exchange-traded funds (ETFs) are bought and sold like single stocks, but they’re more diverse than single stocks.
They’re a collection of index funds: stocks from high-performing companies known for being reliable investments.
They’re often referred to as “blue-chip” companies, because in the game of poker, the blue chip has the highest value.
Ever heard of the S&P 500?
It’s an index that simply tracks what these powerhouse companies are worth.
An ETF allows you to spread out your money over all of these companies.
ETFs are passive funds, meaning that no one is managing your investments for you.
How to make money on stocks?
When it comes to single stocks, people try to follow this rule of thumb:
buy low, sell high. You want to buy a share of a company when it’s inexpensive, then sell it later at a profit.
Another way people make money on stocks is by collecting dividends, which means a company pays stockholders a regular share of the company’s earnings.
But “playing the stock market” with single stocks is just a sophisticated game of poker.
The best way to make money on stocks is by investing in growth stock mutual funds and patiently waiting.
Having a long-term approach to investing allows the two most powerful forces in all of finance to work together: time and compound interest.