The Stock Market

The stock market is one of the best ways to generate passive income and grow your savings. Consistent and smart investing can provide financial returns that set you up for the future and even retirement. I myself have made 30% profit trading on the stock market over the last year, and if I can do it, so can you!

As a minor, we can’t trade stocks by ourselves, so we have to rely on a guardian account or custodial account. A guardian account is owned by your guardian, and is taxed at their rate, while a custodial account is owned by the minor, with the guardian still in control until the minor reaches a certain age.

One of the most important things to understand when trading stocks is the time value of money, which we have a separate lesson on. Another important concept is that of risk and return. This basically just states that stocks with lower unpredictability will yield lower returns, but have less risk of losing money, while stocks with high volatility could yield high returns, but you can also risk losing lots of money. This is important to consider when investing in a stock, and depends on how aggressive your approach to investing is as well as your time commitments. Here are some basic concepts that most people should follow when they invest.

1. Stay up to date with the market… or don’t

When actively investing in the stock market, it can be a good idea to keep tabs on stocks you’re considering, as well as the situations of the stocks you already hold. Keep up with earnings reports, general industry and company news, and factors such as future profitability. By putting in a bit of work and conducting thorough research, you can decide more confidently whether to buy, hold, or sell. Although this is true, some people might just not have the time and energy to use this method. For those people, tip 5 can help!

2. Don’t buy penny stocks

Penny stocks are defined as a stock that trades for lower than a few dollars. It is a good idea to stay away from these stocks, as they have super high volatility. While sometimes a penny stock will give mind-blowingly high returns like TSLA or AMD, most of the time they will fail to perform. The low trading volume and low interest in penny stocks leads to its drastic price changes, making it dangerous to pursue these stocks. Whenever you look at the top losers each day, they are most likely to be penny stocks down over 10%. A main appeal of penny stocks is that they are cheap, but many brokerages nowadays offer fractional shares, making it easy to buy any amount of a stock you want, making these stocks lose their only appeal.

3. Stay Calm

There will be many times in your stock trading career that a stock or the entire market will drop, causing mass panic. Investment gurus will tell their viewers all sorts of reasons to be alarmed and encourage immediate action. In these situations, it’s important to stay calm and be logical when making decisions. Don’t get your information from any single person or source, and don’t be tempted to sell a stock just because of some speculations. Oftentimes, the best strategy in a declining market is to just buy the dip. I personally have lost many opportunities while trading stocks because I was too impatient and hasty. Whatever you do, don’t panic!

4. Open an IRA Account

An IRA, or Individual Retirement Account, is a retirement savings account that is used for long term investing and saving. These accounts have tax benefits, and money taken out of an IRA after the age of 59 1/2 will be tax free. You can choose to invest in a variety of assets, including stocks, bonds, ETFs, mutual funds, and even real estate in some cases. As long as you have an income, you can open an IRA. However, a downside is the contribution limit of $6000 annually. If you are too young, don’t worry! Your parents can open an IRA account for you as long as you have an income, no matter how small. Even doing the dishes could be counted as an income! Through the concepts we have learned in the compounding lesson, we know that the amount of money saved from tax deductions will be very significant in the long term. Say that you invested $500 into the S&P 500 through an IRA annually starting at age 16, by the time you are 60 the sum could possibly reach 360k based on historical returns.

5. Invest in Index Funds

Many people don’t want to spend lots of time researching stocks, which is why index funds are a great way to invest. Index Funds are a collection of stocks, such as S&P 500 funds, which track 500 large companies in the United States. Investing in index funds will help diversify your portfolio automatically. You may ask then: why can’t I do this myself? The answer is that you can, except it would be a lot more work. Although index funds charge a small fee, it is to pay for the research that goes into adding and removing stocks from the fund based on their performance. This way, you just have to buy and hold. Historically, the S&P 500 has had an annual return of 10.5%, which even beats out many hedge funds! In summary, if you don’t want to research stocks, index funds will give you a consistent yearly return.