In last week’s article, Growing Your Savings, we talked about the 4 main types of savings accounts and their uses. If you haven’t read it yet, I strongly recommend doing so before coming back to this article—it’s got some useful info! Hopefully, your biggest takeaway from that article was the idea of passively using your savings to grow your wealth through compound interest. This week, we’re going to cover something a little different: using your savings actively. We’re going to be discussing investing.
As you can probably tell from the above definition, investing is a pretty broad term. It’s a word that refers to a wide array of fields, from real estate to hedge funds to rare art. Today, however, we’re going to be focused on investing in securities (tradable financial assets with intrinsic value), as that is arguably the most accessible form of investing for students.
While there are many things that could be classified as a security, here are some of the most common:
Shares of a company (i.e., stock)
U.S. Treasury Bonds, Bills, and Notes
Certain kinds of Certificates of Deposit
Mutual Funds
In this article, we’re going to take a look at 3 of these: shares, bonds, and mutual funds. Let’s get into it.
Shares
When someone says that they’ve bought stock, what they’re referring to is a share or shares of a company. By purchasing shares, a person has become one of thousands of partial owners of a publicly traded company. Each share has a certain value; it’s worth something. People buy shares in hopes of later selling them on the market for a higher price and turning a profit.
If you open up the Stocks App on your iPhone, you can search up any publicly-owned company’s stock and you’ll find a number. It represents the price that an individual share of that company sold for in the most recent market transaction. But what actually determines this price?
Simply put, the price of a share is determined by the basic forces of supply and demand. If a company is widely believed to do well in the future, a lot of people will want to buy that company’s stock, and the ratio of buyers to sellers increases. The price goes up. If, on the other hand, a company is widely believed to take a turn for the worse, less people will want to buy that company’s stock, and the ratio of buyers to sellers decreases. The price falls.
When you buy stock, your primary goal is to sell it at a higher price than you bought it for. Note, however, that this is not guaranteed; it’s quite possible to lose money on the stock market. If you want to consistently turn a profit, patience is key. Don’t dump your savings into a risky stock in hopes of becoming a millionaire overnight. Research companies you want to invest in, then buy shares and hold onto them for a few years. Over time, you’ll have a good shot at growing your investment by a decent percentage.
Here are a few potentially profitable, low-risk companies to consider investing in as a student or investing beginner. Note the ticker symbol in parentheses, as this is what the companies will go by on major stock exchanges.
Procter & Gamble (PG)
P&G owns several companies, including Tide, Pampers, Bounty, and Dawn. Its revenue comes from consumer staples, meaning it’s a great low-risk option and a reliable source of steady dividend growth.
Costco (COST)
Costco has a loyal consumer base and has historically fielded recessions very well, meaning it’s another lower-risk option with potential for long-term growth.
Johnson & Johnson (JNJ)
Johnson & Johnson has a relatively diverse product line and stable demand in the healthcare industry. Its huge dividends (~3%) are another plus.
A quick point of clarification: a dividend is a bonus paid out to shareholders by some companies on a regular basis, often quarterly (4 times per year). It’s expressed as a percentage of share price. Think of it almost as earning interest on your stock.
To buy stock in any of these companies, you’ll need to set up a brokerage account if you don’t already have one. A brokerage account acts as a sort of middleman between you and other investors: it allows you to buy and sell securities, including stock, on the market. If you’re not 18 yet, you’ll need to set up a custodial brokerage account. This type of account is opened by an adult for a minor, and it allows under 18s to hold shares in their name while a trusted adult maintains ownership of the account. If you open a custodial account, ownership will be permanently transferred from your parent/guardian to you once you reach the “age of termination,” which is usually 18 or 21, depending on where you live.
Charles Schwab, Vanguard, and Fidelity are all great options for opening a brokerage account. They offer lower fees, extensive services, and custodial options for minors. If you want to start investing in the stock market as a young person, go with one of these three.
Bonds
A bond is another type of security investment that is, in essence, a loan. When you purchase a bond from an institution or company, you’re agreeing to lend them your funds for a set period of time. At the end of that time period, you’ll be paid back in full, plus interest. Bonds are far less risky than stocks, and as such have lower potential earnings. They’re a great way to ensure moderate returns without the potential for huge losses and are an essential part of any diverse investment portfolio.
However, bonds can still carry an element of risk. If you opt for a higher-yield bond from a private company, there is always a higher element of risk involved. If the company does very poorly, there is the possibility that it will default on repayment, and you’ll lose your investment. Always exercise caution when buying private bonds.
Conversely, some of the least risky bonds are those purchased from government institutions. The U.S. Treasury, for example, offers several types of bonds. As a student, your best Treasury Bond option is going to be Treasury Bills, commonly called T-Bills. Their terms can be anywhere from 4 weeks to 1 year, meaning they offer some nice flexibility. Their interest rate, while lower than other types of bonds, is still higher than most savings accounts. Plus, they are virtually risk-free because they are backed by the full faith and credit of the U.S. government. For all of these reasons, T-Bills are an essential part of most student’s portfolios.
Mutual Funds
Mutual funds are the single best way to invest in a lot of different stocks at once. You buy into one the same way you would a company: by buying shares. But, rather than purchasing a piece of a company’s ownership, you’re pooling your money with a bunch of other investors. This pooled fund is then invested in a number of different stocks, and your investment will follow the performance of these companies.
The main perk of mutual funds is instant diversification. When you buy into one, you’re effectively purchasing a micro-share in dozens of different companies. Because of this, mutual funds are a great lower-risk option with a solid potential for growth over time. If one company does poorly, your portfolio isn’t tanked because the fund has a stake in so many others. For this reason, mutual funds are another essential part of a healthy portfolio.
ETFs (Exchange-Traded Funds) are one of the most common types of mutual fund, and are a fantastic option for students and young people. They’re designed to track a specific set of companies, often a well-known index like the S and P 500 or the Dow Jones Industrial Average. Because the U.S. stock market tends to grow as a whole, ETFs like these will turn a profit for the majority of years.
My number one ETF recommendation is the Vanguard S and P 500 ETF (VOO). It boasts low fees (~.03%) and a consistent record of positive yearly growth. As of the time of writing, a VOO share is worth around $575.
In the end, investing is just another tool for growing your savings, but it doesn’t always happen fast. At this stage of life, your primary goal should be to buy and hold. Think about long-term goals, not instant gratification. Curate a diverse portfolio with a nice mix of lower-risk options with moderate returns. Just to recap, here are the 5 investment options I recommended in this week’s article. Keep in mind that I am by no means an expert in markets; these are just the options that I have researched and found to strike a balance between risk and return. Always apply your best judgement when investing, as there is always an element of risk involved.
Stock
Procter & Gamble (PG)
Costco (COST)
Johnson & Johnson (JNJ)
Bonds
U.S. Treasury Bills (T-Bills)
Mutual Funds
Vanguard S and P 500 ETF (VOO)
Thanks so much for reading this week’s article! Hopefully, you’re leaving with a newfound sense of confidence and feeling ready to start building some good habits early. If you have any questions, or a topic you would like to see covered in the future, feel free to to drop it in the comments on this post. I’d love to hear from you!
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Thanks again, and see you next Friday.
Sam Nichol, Founder