Having “The Talk” About Making Your Money Work Harder: Part 4 – Stocks
Welcome back to our five part series on making your money work harder! This series is part of a BIG conversation I had with J where we talked about other ways to invest his money beyond the Bank of Mom.
What are stocks?
A stock is a piece of a company. People buy stocks (or shares) of a company, and with that money, the company can grow their operations. When you own stock in a company, you actually own a piece of that company!
How much does it cost to buy stocks?
At any point in time, one share at Company A is worth $X. The price of each share changes all the time, even during the day. Let’s say you own 4 shares of Company A, and the price at the end of the day is $50. The value of your holdings would be 4 * $50 or $200.
Shares at Company B cost a different amount, as they do at Company C. Look up the company you’re interested in to see the current price.
Why do people buy stocks?
Investing in the stock market has the most potential for growth. There is some risk involved — there aren’t any guarantees that you won’t lose money. However, historically over the long term, the stock market is where you can potentially earn more than you would with savings, bonds and CDs. The Simple Dollar thinks an average of 7%.
When should I buy stocks?
Ideally, you want to buy when the stock price is low. (Think of it like the stock being on sale.)
And in a perfect world, you also want to sell when the stock price is high.
With that being said, don’t try to time the market!!
Instead, let’s dollar cost average, which basically means invest regularly.
For example, instead of investing $6,000 in January when I think the market is low (and hence good to buy), I invest $500 per month, every month. In this scenario, I end up purchasing more shares when the prices are low and less shares when the prices are high.
There are people who don’t like this strategy, like The College Investor. He thinks you should invest one lump sum if you have it. You’ll have more time in the market and can target your ideal asset allocation immediately. (Asset allocation = your desired mix of stocks, bonds and cash.)
In the case of a windfall, I agree with him — there’s no sense in having that money sit around waiting to be invested.
However, we often talk here about saving at least 10% of everything that comes in. Putting that 10% (or more) into saving and investing regularly keeps you actively investing all the time. Plus, it’s even better on autopilot where you don’t even have to think about it.
Remember, you can never tell when the top of the market is — so you may as well keep investing regularly.
If the first answer to the question, “When should I buy stocks?” is often, the second answer is early. Buy stocks when you’re young so that you can experience the power of time and compound interest.
We bought some stock
I thought this conversation would make more sense if we actually bought some stocks.
Stockpile is great because it has a low barrier of entry — invest as little or as much as you want by buying fractions of shares. Also trades are only $0.99 with no monthly fees or an account minimum.
I let J pick an individual company to invest in, and he chose Dick’s Sporting Goods, a large company with headquarters near us.
We looked at the history. The price per share had been much higher and was going down, and he didn’t want to buy.
I re-iterated the part about a lower price meaning the stock was on sale and mentioned PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE. He decided to buy.
He bought $49.01 worth of shares (which worked out to be 1.885 shares at $26 per share) plus the $0.99 transaction fee = $50.
Then we bought more!
Because I’m not a fan of picking individual stocks, we purchased an index fund. (I also thought it would be fun to compare the individual stock to the index fund over time.)
But first, I had to explain a few more new terms.
A mutual fund is basically buying a lot of small pieces of a lot of companies (as opposed to buying a piece of ONE company, like we did earlier).
Many mutual funds have a fund manager — someone who buys and sells within the fund, trying to earn higher returns. These funds will have higher fees — for buying and selling as well as commissions (or loads).
Index funds are passively managed funds. Their only goal is to match a market index. The fees are lower here, too.
He bought $49.01 worth of shares (which worked out to be 0.37211 shares at $131.71 per share) plus the $0.99 transaction fee = $50. He also got $5 free for signing up which bought 0.03804 shares at $131.45 per share.
(If you want to try Stockpile, make sure you look around for the $5 bonus or drop me a line and I’ll send you an email. I don’t get any commissions or referral bonuses — I’m just happy to help you or your kids start investing!)
Today + Beyond
It’s fun to check out the Stockpile app once in awhile (I find it better than the desktop version). We’ve made a few dollars, and can look at our how our share value has increased or decreased daily, weekly, monthly and as long as we’ve been investing (three months).
The $100 we invested is worth $112.46 today, making our money work the hardest so far in our series.
For our purposes, we’re holding for the long term. So at this age, we’re really not worrying about whether the share value goes up or down. We will, however, track the shares and value over time, which you can read about more in part 5 of our series.
Because it’s $0.99 to buy, we’ll wait until J has a bit of money saved up before buying again. Stockpile is nice because you can also buy gift cards for stock (in stores or online), which may make a good gift for someone’s birthday this year.
Also note that there is also SO much more to stocks and investing than I’ve covered here. My goal was to 1) introduce the concept of stocks and 2) start investing and we met both goals. We’ll dive deeper in future lessons, especially as J gets older.
What about you? Have you used Stockpile? Do you have another avenue for teaching your kids about investing?