Remember the GameStop stock frenzy? It was only a few months ago that the stock market had the attention of what seemed like the entire nation, akin to the following the Netflix original Tiger King garnered at the start of the COVID-19 pandemic. While everyone understood the premise of Tiger King, the reasoning behind GameStop’s resurgence of fame is a little more nuanced, especially for students who are often unfamiliar with all things labeled “stock market.” Whether this describes you or not, if you’d like to learn more about how to get involved with the stock market as a college student, this article is for you!
The GameStop–stock market situation
To start, let’s take a closer look at what went on with the GameStop stock market situation. The reason GameStop was in the news so frequently back in January was because of how high its stock prices had skyrocketed as a result of what’s known as short selling. According to an NBC article, short selling is something professional investors, including hedge fund managers, do to profit off falling stock prices by borrowing shares to sell then buy back later. As David Ingram and Lucy Bayly succinctly put it, “They’re basically bets that the company will fail.” Most of the time this strategy of short selling works in the investor’s benefit—they reap the benefits of the falling stock prices. But if stock prices rise instead, the short sellers lose money as they can no longer sell the stocks at a higher price than they paid for them.
This is exactly what happened with GameStop. A community on Reddit known as r/wallstreetbets invigorated its vast community to buy stock in GameStop to drive up stock prices at the expense of professional investors who made what they believed to be a safe bet against the success of the company. Not only did this have a significant impact on the economy and the stock market across the board (causing system slowdowns and temporary shutdowns), it was also the first time in recent history that a group of individuals has banded together against the Wall Street establishment and won. But how exactly does the stock market work, and how can you, as a student, benefit from it? Let’s dive into the basics.
Related: A High School Starter Guide to Financial Responsibility
Knowing your stock market basics
The truth is there are many ways to invest your money at varying levels of risk and return. Risk essentially refers to what level of variability you’re comfortable with, while return refers to your level of profit. In general, a higher level of risk results in a higher return, but this isn’t always the case. In other words, the more aggressive you are with your investments, the more profit you should hypothetically earn. However, it’s important to remember that earnings take time, and the stock market will ebb and flow. These natural changes will have a greater impact on riskier investments in the day-to-day. The basic premise of investing is to gain money over time as the value of what you invested in grows and you receive a portion of that profit through dividends, which you can either use as income or reinvest into the same stock to build up a greater share.
Understanding how day trading works
Day trading through apps such as Robinhood has become a trend among college students and young people in general. In fact, Robinhood is an example of a trading app that saw an exponential increase in use during the GameStop stock-buying bonanza. One reason for this phenomenon is the low threshold required to invest, meaning you don’t need a lot of money to begin with to start trading. According to Investopedia, the term “day trading” refers to the buying and selling of individual securities within a single day. Essentially, you’re trading a lot of stocks frequently in the hopes of turning a profit. This type of investing involves a lot of decision-making on your part and requires a fair amount of knowledge regarding stock market trends. If you’re a day trader, your goal is to take advantage of small profits daily to make money gradually and consistently over time. Along with trading various stocks in the stock market comes cryptocurrency. This is a fairly new form of investment that’s similar to regular stocks. However, it involves trading in digital currency rather than stock in a specific company. This is where terms like “bitcoin” and “dogecoin” come from.
Related: 5 Tips to Help College Students Manage Their Finances
Investing in individual stocks
Another option is investing in individual stocks for the long term. For example, let’s say you wanted to buy stock in Apple. You would set up an account with an online broker and specifically select Apple as the corporation your stock would go toward. If you pick a strong and healthy company, your shares will usually increase steadily over time. When you want to retrieve the entirety of that money, you can sell your stocks and reap the profits. However, if Apple suffers losses and its stock shares fall dramatically, your investment will be worth less than you put in. If this is an option that you’re considering, it’s usually a good idea to invest in multiple individual stocks; otherwise, you’ll be putting all your eggs in one basket.
Benefitting from mutual funds
Mutual funds are a great example of a form of investment that requires less decision-making and research on your part while also bringing more stability to your portfolio. When you put money into a mutual fund, you’re allowing professional investors to use your money along with other investors to diversify their stock holdings and turn a profit. Of course, because someone else is making the decisions for you, they get to keep a cut of the earnings. However, because your money is distributed across many different individual stocks, you have a better chance of making a consistent profit. Be aware though that many mutual funds have a higher minimum investment required than apps like Robinhood, so depending on your financial situation, this may or may not be attainable. You may have also heard of index funds. These are a type of mutual fund that operate on the same basic principles but follow a specific stock index such as the S&P500 rather than being invested into a diverse portfolio. According to Fortune Builders, they’re much better for “passive earners who want to match the overall market’s returns.”
Related: 7 Ways Students Can Make Money During the Pandemic
Locking down with bonds
If you’re simply looking for an investment option that grows faster than your current savings account and won’t change significantly with the stock market, then bonds might be the thing for you. Bonds basically have you lend money to the government or a corporation for them to spend and pay back to you later with what’s typically a safe and previously agreed–upon amount of interest. The minimum required starting point varies, but you can buy a bond from the US Treasury for as little as $100. By investing in individual bonds rather than a mutual fund, you can claim more of the profits for yourself by cutting out the middleman (the professional investor).
Taking advantage of Roth IRAs
While retirement isn’t something on most students’ minds, it’s important to consider when setting up your financial portfolio. There are many retirement plan options that’ll become available to you as you enter the full-time workforce, but for now, you can investigate a Roth IRA. This is specifically for investing money you earned and paid taxes on within a specific calendar year to save for retirement. While that may not sound very exciting, if you start now, it’ll gain a significant amount of interest by the time you’re ready to withdraw it in 40 or 50 years. And the best part is that withdrawing it will be tax-free! If you want more information on whether a Roth IRA is right for you, Investopedia can provide you more guidance.
Related: How and Why to Save for Retirement in Your 20s
You may be thinking this is all well and good but unattainable for you right now. While most students don’t have thousands of dollars to throw around in the stock market, it’s worth setting aside at least a little money to invest now—because the earlier you get started, the more money you’ll make in the long run. Although investments are a bit risky, they earn significantly higher earnings and interest than a standard savings account where you’re most likely earning only a few cents a month, if that. No one expects you to become a stock market guru, but with these tips and some light internet research, you could be well on your way to investment literacy and setting the foundation for a successful financial portfolio down the road.
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