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For students looking to invest in the stock market, it’s important to remember to be patient, stay in the game and refrain from letting the short-term volatility of the market cloud your vision.

The stock market is a “collection of markets and exchanges,” where shares of publicly-held companies are bought, sold and issued, according to Investopedia. The market is typically  used as an indicator of the economy’s health, in addition to measures such as unemployment and interest rates.

I view the stock market as a living thing that moves and reacts with news, as well as people’s fears and outlook of the future, as a large part of the stock market’s movements depend on levels of uncertainty.

A perfect example of this is the stock market’s reaction to the coronavirus. There was a dramatic dip in the Dow Jones Industrial Average in mid-March. As a consequence of the future’s uncertainty, many investors began pulling money out of the market and holding their funds in banks.

There was concern that pulling money out would cause a rapid drop in the market’s price, and it did, but fortunately not to the extent that some anticipated. Recently, however, the market has been on the rise.

Single-stock options are now on the rise to incentivize people to put money back into the stock market. Stock options are contracts that allow the investor to buy (call option) or sell (put option) a stock at a specified price within a certain time period. This allows slightly more certainty for the investor rather than simply purchasing a stock, however, there is still risk.

It’s important to remember that the performance of the stock market right now is hardly indicative of the health of the economy and the economic performance of companies. More often than not, stocks can be undervalued or overvalued based on investors’ expectations and perception.

Successfully investing in the stock market, a ‘machine’ based largely on investors’ emotions, requires you to put your emotions aside. When the stock market begins to decline, investors panic and begin to sell shares, potentially at a loss, causing further decline in the stock. You have to outsmart yourself and your own desires to pull out.

Unless you are Warren Buffet and spend your days reading financial statements of publicly-traded companies and following financial news closely, play the long game. Purchase shares in a fund — which is a portfolio of stocks managed by a fund manager — or a company you believe will be able to “weather the storm,” and leave it for 10 or 15 years.

If you zoom out to a 10-year trend of the Dow, you will see a steady increase over the years. Those who invested in Dow in 2010 will have seen an almost 150% return, more than doubling their initial investment. Same goes for those who invested in funds tracking the S&P 500, a similar grouping of major companies.

Andrea Lan is a junior finance major. She is a Smart Money coach in the Office of Financial Literacy. Her column appears bi-weekly. She can be reached at [email protected].

 

Published on October 15, 2020 at 12:22 am