Whenever somebody asks me what can I invest to make some money in the stock market, I tell him or her mostly just one answer. What do you want to be a trader or investor? If you don’t know the difference check out the article that I wrote before. Link below
Trading vs Investing: Know the difference
For a typical average investor who probably has got a job or a business, don’t know much about investing in the stock market, the best piece of advice I can give is to invest in Index Exchange Trade Fund. To be more specific ETF for S&P 500. Now you can choose the ETF for your own country, which probably works just as good. Essentially when you buy a country Index based ETF you’re essentially buying that specific economy. So in US it will be S&P500, Germany will be DAX, FTSE for UK and Nifty for India just to name a few. Lets get into detail about this.
What’s S&P 500? It’s a stock market index, which consists of market capitalizations of 500 stocks traded in the Nasdaq or New York stock exchange. Why should you buy the S&P 500 ETF? Lets take an average investor who is busy with his job and family and life or whatever. He doesn’t have the time spend hours and hours of research in finding the perfect stock. For that he will have to spend a lot of time going through years of statements, news, research more on the management and stuff. Even if he decides to buy that specific stock he could be wrong. That company could go bust. How can we avoid this risk? Instead of buying 1 single company why don’t we buy the entire American economy? In this case the S&P 500. You’re literally buying 500 large companies. Since your buying the whole index you’re risk is literally diversified. Some companies might collapse, some might succeed. Anyways when it all adds up you’ll make some return on your investment.
Why is investing in an individual company risky? Firstly it’s extremely hard to find the perfect company. Even if you find one it might go through a change in CEO or go through a crisis period where it can simply cease to exist. 10 years ago when I was in university the APPLE just released its first Iphone. Nobody really cared about it. I remember one student had it. All the rest had mostly one brand of phone. You guessed it right. NOKIA. Where is NOKIA today and where is APPLE today? Back then NOKIA was a giant and APPLE was nobody. NOKIA was once domination in the world mobile markets now you rarely get tot see it anymore.
Now you can research further your company’s financial statements research it for past 5 years and 10 years and you might think the company is doing well. But accounting fraud happens all the time. WorldCom, Enron, AIG, Tyco, Satyam performed massive accounting fraud which led to inflating stock market prices. Eventually they got caught and led to their demise. They were all once powerful companies listed in their specific stock exchange. Enron collapsed from $90 per share to $1 in 1 year.
I am certainly not trying to discourage the average investor to research company stock. But all I am saying is why waste your time and why risk a lot when you can make consistent return by buying the entire stack of stocks rather than buying a single company. Why not buy the entire US economy than trust all your hard earned money in one US Company. Many investors like Warren Buffet and Jack Bogle has highly advocated for index ETF investments. Here are the youtube links.