I want to buy stock…I think. Do you think this is a good idea for a college student with a little money lying around? How do I know which stocks are a good investment?
First off, I must say it is very impressive and mature of you to look into your investment options at such a young age. Investing in stocks is risky and complicated; quite honestly, I think there are better investment options. Although the recession has officially ended, our economy is still weak and slowly recovering. The stock market is just as unstable as the economy — making it more difficult than usual to predict the best investment. Before I completely write off stocks though, let me give you a quick overview of the stock market.
Types of Stocks
There are two basic kinds of stock, preferred and common.
Common Stocks are, you guessed it, more common. These are the ones you will want to look at when you are investing. A common stock gives you ownership in a corporation, but you have very little liability and will be at the bottom of the ownership ladder.
Preferred Stocks allow you to have partial ownership of a company. As a young investor you probably will go with common stock because preferred stocks are usually not for individual investors. Traditionally, other corporations purchase these types of stocks from companies.
Categories of Stocks
Stocks can be further broken down into different categories depending on how they do in the market and their risk. I wont bore you with all the categories but I wanted to bring attention to defensive stocks. These are stocks that generally do well in a poor economy; the companies that issue these stocks are typically in food or utility-type markets. Typically they are stocks on goods that people don’t cut back on even though they are financially struggling. The problem with these stocks is that they are not bound to skyrocket if the economy improves.
There are other stocks that may seem like a solid bet such as tech stocks. Apple Inc. (AAPL) and Google (GOOG) are two prominent examples. To some, the products from these companies seem like a basic need. If you trust these companies and you want to take a gamble go your gut, but there is no predicting how they will do. Both these companies had an incredible year last year, but the smallest PR gaffe can send them plummeting. These types of stocks are better for long-term investments.
Another category of stock that may catch your eye: penny stocks. These stocks are generally offered at a cheaper rate: less than $3 a share. Penny stocks carry very high risk because small companies that are usually just starting up sell them. Penny stocks can yield a high reward, but typically seasoned investors that know how to play the market invest in these types of stocks.
Just kidding…not just yet! It’s important to do extensive research on the companies you are you thinking of investing in. I suggest you try something like Investopedia’s Stock Simulator. This free simulator lets you invest $100,000 of “virtual cash” with no risk attached. With a stock simulator you can get a feel for what real life investments are like.
The thing about the stock market is that it’s kind of like a game for adults. Buy low, sell high; but how do you know when the stock is at its lowest or highest? You have to be accepting of the possibility of losing your money. If you are set on investing in stocks I suggest finding a professional broker who can tell what the best investment for your budget will be.
A great thing to check out is Betterment.com a company created to make investing simple and easy for those not familiar with the investment industry. It provides advice as well as easy to use tools that will help you invest your money. You have options like choosing the length of your investment and the level of risk you are willing to have — this way the site can calculate stock and bond allocations that suit you best. There is an annual fee of 0.9% the total balance you have with them.
Safer Investment Options
If you are not ready for the risk associated with stocks, there are safer investment options low risk, low reward investments are not as flashy as stocks, but they will keep your money safe while allowing for some growth. Three popular options are:
- Savings Bonds: backed by the government, these bonds will guarantee you will not lose any money. The drawback: they do not have the highest performance rate.
- Certificates of Deposit: offer you interest on your money. The more you invest and the longer you keep it in the CD the more money you will receive in return. Drawback: CD rates are currently very low due to the weak economy. You can find some banks that have higher rates, you just need to shop around to compare rates
- Money Market Accounts: They are not as safe as the above options but safer than stocks. The nice thing is you can keep your money in the accounts if interest rates are rising, or pull your money out in a few business days. There may be restrictions or fees so read up on those first. Drawback: You still have the potential to lose money and because rates are variable you are not sure how much return you can get the next month.
One thing I have been keeping an eye on is investing in metals. Over the past few years the value of gold has skyrocketed and continued to grow. If you buy an ounce of gold for $282 in January 2000 that same ounce would have cost $1,120 in January 2010 according to KITCO. That’s $838 earned! Can you imagine if I bought more?
Anyway, that is my two cents on stock. There is no definitive answer and the type of investment depends on what you are willing to risk. At such a young age, you are about to have a lot of big expenses ahead of you, whether it’s for job relocation after you graduate, or paying off student loans. Investing your money is a smart decision and playing the market can prove to be very lucrative, but I personally believe security trumps risk as you are transitioning from college into adulthood.