There are four popular ways to invest in stocks:
- You can buy shares of one company
- You can buy shares in a mutual fund or ETF (exchange traded fund)
- You can bet that the stock will go down in value (short position)
- You can bet that stock will go up in value (long position)
There are winners and there are losers, and the stock market has minted countless millionaires and even billionaires – many of whom have made more money investing in stock than they ever could have made any other way. The stock market will make you a millionaire in your sleep.
You can buy individual stocks or groups of stocks. Individual stocks can swing wildly in value over both short and long periods of time, so I don’t recommend you put more than 10% of your investments in individual stocks. If you would have bought $5,000 in Amazon stock in 1997, it would be worth at least $2.5 million as of this writing. Amazon has gone from $18 a share to over $1,100 as of this writing.
Is Investing in Stocks Risky?
Since you are investing in business when you buy stock, there is always the chance that the business could go out of business and you lose all of your money. Enron, an energy trading company’s shares went from a high of $90.56 in the year 2000 to a low of $0.67 in January 2002. Stockholders ended up losing $74 billion.
The entire stock market can also swing wildly. For example, on October 19, 1987 the US stock market dropped 22.61% (the biggest percentage daily loss) and on March 15, 1933 the stock market was up 15.34% (the biggest daily gain). But while those are massive swings and there is certainly risk in investing with stocks, as the country grows, wealth grows, and the value of companies continues to grow.
Over the past 100 years the entire United States stock market has grown an average of 7.3% per year. You can see the daily ups and downs in the stock market in the chart below, but the trend has always been up over time.
Dow Jones Industrial Average – tracks US stocks (1900 – 2017)
It’s never wise to have your entire portfolio in any individual stocks because you don’t want to lose a ton of money if the value of the individual stock drops or all of your money disappearing if a company goes out of business. This is why I recommend putting a majority of your long-term investments in the entire US stock market. The longer you invest, the more your money can compound and grow.