How do some of the myths about the stock market even start?
One would guess it comes from simple perception.
It’s the belief that you need a significant amount of money to be a successful investor.
That couldn’t be further from the truth.
You don’t need $1 million to start investing the right way.
You don’t even need $1,000.
All you need is a small stake and the right level of confidence.
Not Everyone Needs to Be Accredited
The stock market is not just for rich people. It’s not just for brokers and people with big boats sitting off the docks of Manhattan or Miami.
The stock market should be a genuine wealth-building tool for America’s middle class.
It hasn’t helped that three major financial crises occurred in the last 20 years. The dot-com bubble, the Great Financial Crisis of 2008, and the Covid Crash of 2020 have turned many 401(k)s into “201(k)s.”
These sharp downturns have impacted confidence in the U.S. and global markets. As a result, middle-class investors – who are typically loss averse and very prone to selling stocks in times of crisis – have walked away from stock market investing.
The numbers are pretty staggering today about who owns stocks and who does not. The field of those still invested skews toward high-net-worth investors.
In 2021, the top 10% of Americans by wealth owned an average of $969,000 in stocks. The next 40% owned just $132,000 on average. The bottom 50% was under $54,000. These numbers come from the blog Financial Samurai.
But dig deeper, and you can see that stock ownership is not as common as it used to be. In 2007, roughly 66% of Americans owned stock.
Today, that figure is roughly 52% and falling.
Wall Street, meanwhile, isn’t as engaged in bringing more Americans into the market. Hedge funds, private equity firms, family offices, and certain institutions are typically designed for accredited investors.
Who is an “accredited investor?”
These are individuals who only qualify for certain asset classes that are heavily focused on the markets. Accredited investors must earn at least $200,000 per year or have a net worth (minus their primary residence) of $1 million or more.
Big banks and big money managers love these investors because they generate massive fees for their bottom line.
But they’ve also contributed to the ongoing consolidation of wealth among the wealthiest people in America. According to New York University economist Edward Wolff, the top 1% of households in the U.S. own 38% of the stocks.
No wonder there is this ongoing misconception that the stock market is a machine built for rich people only.
However, don’t buy into the myth. The stock market is your tool to find success and build wealth. Here’s how to do it.
Start Small, Trade Small
If you are out of the market or just starting to dip your toe into it for the first or second time, you’re in the right place.
You see, you should start small if you’re learning how to trade and invest. And even if you do have a lot of capital, you shouldn’t just dive into the markets with both feet.
I’ve had many conversations with people about where and how to start investing. And I always try to get people to think in terms of “rules.”
Rule one: Don’t think that you don’t have enough money to get started.
For example, I listen to people say that they need to hit a particular savings milestone before they start investing. Some people say they need $10,000 or $15,000 in their savings account before they start investing.
No. Start now.
Instead of putting $100 or $200 away each week or month into a savings account, put it in the market. The savings account will pay you a paltry 0.08% interest, which is lower than the inflation rate. You’re actually losing purchasing power by parking your money in that savings account.
Think of it this way… you’d need 866 years to double your money at 0.08%. If you were earning 10% a year, you’d need just over seven years to double your money.
There are undervalued companies that you can buy for $50 or $100. Their stocks might be trading even lower than the amount of money you have to start building a portfolio, which allows you to buy multiple shares. If you have $50 and the stock is at $5, buy 10 shares.
If you have $50 and it trades at $10, buy five shares.
How to Pick Your Favorite Starter Stocks
You do not need to worry about buying every single stock that interests you at once. Start with a few ideas and pick your best ones.
You can think about a few straightforward metrics that will help you decide which stocks you might want to buy. Set your list of ideas, but think about these questions.
- Which stock has the most growth upside?
- Which stock offers strong dividends that can boost my return and beat inflation?
- Which stocks are the safest and allow me to invest for the long term?
I will dig deeper into metrics like Return on Equity and profitability ranks to answer the first question in future issues. I’ll talk more about cash flow and Dividend Aristocrats to answer the second. For the third, consider TradeSmith Finance as a tool to give you a clear indicator of what is a buy and what is a sell. If a stock is in the Green Zone, you can invest with confidence.
If you don’t want to focus on stocks, you can also choose index funds. If you buy the S&P 500 index fund (SPY), you are buying a fund that replicates the performance of the largest publicly traded companies in this index. That’s a more passive way to invest for the long term and ride the historical, upward bias of the markets.
The SPY currently trades north of $400, but it is possible to purchase fractional shares and build your position accordingly. I’ll discuss the risks and rewards of fractional shares later this week.
But for now, have confidence in the fact that the markets are not just for the wealthy.
They are your tool to turn $25 into $50… or $100 into $500 over the long term.
Shoot for 10% annual returns over time. It may not sound like much, but I can tell you that overnight doubles don’t happen to people just starting out. Typically, you can expect overnight massive losses with the wrong starting mindset. We’ll be back tomorrow to talk about how to trade rising oil prices.