Stock Market for Beginners – How and Why you Should Invest in the Stock Market

What is the stock market, why you should invest, and how to build wealth over the course of your life? [music] Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of The Retirement Income Show, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and author of the upcoming book Core4.

There’s a lot of myths about the stock market. Should you invest? How do you invest? There’s a lot of good information on the internet, but there’s also a lot of bad information on the internet. We manage money professionally for people in the stock market. I want to share some of the things that you need to know if you’re going to open up an investment account and how you should invest that money and the way you should look at it.

One of the common things that we see is just people don’t understand what the stock market is. The best way to understand the stock market is, when you invest, you have an ownership interest in the biggest companies in the world. If you want to own Amazon, Facebook, Google, MasterCard, Visa, Exxon, Chevron, these are all companies that make a lot of money and you can have an ownership interest in them. At a very basic level, if we think about the lemonade stand analogy. Let’s say, little Jimmy has a lemonade stand and he opens it in his front yard and people are coming by and he’s selling lemonade. He’s making money. Jimmy says, “I’m going to open a lemonade stand on a second street,” and that lemonade stand starts making money. Now, all of a sudden, Jimmy has a good business that’s making decent profits. If Jimmy wants to make more lemonade stands and expand across the country, this is what we call going public.

Jimmy can have that lemonade stand listed on the stock exchange, and you as an investor, could invest in little Jimmy’s lemonade stand. How that works is Jimmy goes to an investment bank. It’s called a Goldman Sachs or a Morgan Stanley. The investment bank is going to do the filings and the paperwork, and they’re going to gather investors, and that money from the investors will go to Jimmy. Jimmy can then invest in other lemonade stands, and as the company grows and more profits are made, Jimmy keeps some and the investors get a return on their investment. That’s what the stock market is.

When you invest your money in a company, you have a right to the assets, you have a right to the profits, and you don’t have any liability. Should the company go bankrupt, you can’t be sued. It gives you an opportunity to participate in the growth of not only the United States economy, but of specific companies and their profits over time. Everyone should have investments in the stock market. Now, there’s a lot of myths out there about the stock market is super risky and it’s like gambling, and I’m scared to put my money in there because I don’t want to lose it all. There’s a right way and a wrong way to invest.

Yes, there is risk in the stock market. Yes, there is some short-term volatility. But historically, the stock market has went up. When we understand some basic principles, it should help you feel more confident to get some of your money invested without the concern of, “Oh my goodness, I’m going to lose it all.” Now, if you invest in penny stocks and companies that aren’t profitable and don’t make any money, that’s a lot more risky than investing in solid what we call blue-chip type companies that have a long track record of making a lot of money. First, let’s look at some historical context. This is a chart we keep on the website, and it talks about the Dow Jones Industrial Average, and it goes back from the 1930s all the way up to 2018. The Dow Jones was at 104. That was the price level in 1934. In 2018, 23,327. That was a 22,000% increase over the course of time.

Now, every single year, did it go up? No. But over time, the stock market goes up because corporations make more money. If you invest in the stock market over time, your investment, historically, will go up in value. Now, a lot of things we hear is, “Well, Troy, the politics situation is a bit murky and I don’t want to invest because of politics,” or, “I don’t want to invest because the market’s at an all-time high.” All these reasons why people don’t want to invest. But here, I want to point out a couple of things. 1963 was a horrible year for the country. JFK was assassinated. The stock market that year went from 763 to 874 in 1964. The stock market, it’s about a 20% increase in the value of the stock market in the year when the president of the United States, somebody as beloved as JFK was assassinated.

Politics can have a short-term impact on the market, but long-term, the stock market tracks corporate profits. There’s always an excuse not to invest. The very best thing you can do is start investing today, and that way over time, you have a good chance of seeing your money grow in value. Can the stock market go down in the short-term? Yes, but the stock market is not a short-term investment vehicle. The stock market is designed to help you build wealth over the course of time. It’s not for trading. Now, you can trade in the stock market, but you should be an investor. Don’t be a trader. Traders lose their money. You may have a friend or someone you know that says, “I make a lot of money trading.”

They’re probably lying. Most traders lose their money. If you want to invest in the stock market, you invest. You become an investor. That means you take some money, you put it into the market, and you let it sit and you let it grow. If you’re in your 20s or 30s, there’s no better tool, historically speaking, to grow your wealth over time than the stock market. But it’s not to trade. It’s not to have fun with and to play around with. This is your future. Your financial future. You want to be an investor, not a trader. When you think of the stock market, don’t think of it as a short-term, I’m going to lose all my money. I’m going to show you the right way to invest your very first $10,000. This is what I want you to do with it. But you are an investor, you are not a trader. If we look at the stock market itself, one of the broadest representations of the entire market is what we call the S&P 500. The S&P stands for Standard & Poor’s.

 

Don’t worry about that. But the 500 is the approximate number of companies in the index. The S&P 500 represents 500 of the biggest companies in the country. The level is 2,984. If we go back, make this full screen, load the max chart, this goes back here to all the way to 1951 here. The stock market is going up. Coming out of the 1940s, we have World War II, we had the Korea War. We had Vietnam. The stock market kept going up. It comes all the way to 1968. This is 2001 to 2019. Yes, the stock market can go down in the short-term, but historically, it always heads the other direction. When you’re an investor and you’re investing for the long-term, this is what you want to take advantage of of is the long-term appreciation of your money. The stock market, depending on which period you go back to, has averaged anywhere from between 8% to 11% per year.

If you go back 50 years or 80 years or 70 years, that’s where the variation in return comes from, but I want to show you something. If you invest $10,000 and you earn 7% on your money, it’s going to double every 10 years. This is called the Rule of 72. When you think long-term, the stock market, historically, has averaged more than 7%, but this is a good conservative number. If you have $10,000. In 10 years, it should be worth about $20,000. In 20 years, that 20 should be worth 40, and in 30 years, that 40 should be worth 80. When you’re spending money and you’re buying things, maybe shopping, doing the things maybe you shouldn’t necessarily be doing, I want you to think about this chart, think about these numbers because instead of spending, if we become investors, the money that we spend today if we invested it, it’s going to be worth a lot more in the future.

Now, this is a 30-year period where your $10,000 at 7% grows to $80,000. If you can make 10% on your money, that same $10,000, it’ll double every seven years, so 20 to 40 to 80 will take place over a 21-year period. The stock market is the only place where you can get these type of returns consistently, historically speaking. Understanding the value of compound interest over time and earning different rates of return goes along ways towards motivating you to continue to invest and make good decisions. Now, if you just leave the money in the bank and you’re only making 2%, well, it’s going to take you about 36 years to double your money, and that’s just one time.

We don’t want to earn 2% sitting in the bank. We want to earn higher rates of return, and we can only do that in the stock market today. Real estate, historically, goes up about 3% per year, but you get these bursts in real estate where sometimes it accelerates and sometimes it goes down, just like the market. But the stock market is a great way to invest over the long-term, but don’t think of it as a short-term trading tool. Think of it as a long-term investment tool. The first thing I want you to do, your very first $10,000 that you save up. As you’re saving this money, you can create an investment account at TD Ameritrade or at Fidelity. And the only thing I want you to do with the first $10,000, don’t think about buying individual stocks. Individual stocks require too much time, too much research.

Many of you probably don’t have enough experience managing money for 20, 30 years to really give yourselves an edge or a competitive advantage over the professionals. The best way for most people to start investing their money, Your first $10,000, I want you to just buy the entire S&P 500. You can do this in what we call an exchange-traded fund. And all that is, is a basket of stocks. It’s a basket of about 500 stocks. There’s a lot of ways to do this. This right here is called the SPY. It’s the spider fund and essentially, if you type in your little ticker of SPY in your investment account, you can buy this at $297 a share. If you get $300 saved, you can go and buy one of these. If you have $3,000, $ 4,000, $5,000 saved, you just buy multiple shares of the SPY. Now, this is why I want you to do it.

The SPY represents over 500 of the biggest companies in America. Historically, this index has averaged between 8% and 11% per year, but you’re automatically getting diversified amongst all the different sectors in the economy. So you don’t have to worry about, “Am I overexposed to technology or financial stocks?” You’re going to be diversified. 2% is Basic Materials, you have Consumer Cyclical Stocks, Financial Services, Real Estate, Defensive Stocks, Healthcare, Utilities, Communication Services, Energy, Industrials, and Technology. By buying one share of the SPY, you’re going to own 500 companies, looks like 11 different sectors here, and you don’t look at it. Don’t worry about it. Don’t check your phone every day. Don’t check your account every day.

The money you put here is designed to be growing over at least a three to five-year period. But, really, this is your future. Invest in the S&P 500 with your first $10,000. Don’t worry about individual stocks. Don’t look at it every single day, and go on about your life. Enjoy life. Keep saving, become an investor, don’t spend too much of your money, and think about the long-term benefits of the appreciation of your money in the stock market.

Make sure to hit the like button below, subscribe to the video, hit that little bell icon so you can be notified when we upload more videos about saving, investing, and really how to grow your wealth over time, and then comment down below. I’d love to get some comments and feedback on the video and answer any questions that you might have. And if you have a friend or family member that could benefit from the video, please share it with them. Let’s try to reach as many people as we can to help them make smarter decisions and become more connected to their money. [music]