Owning shares of companies in the United States economy is one of the best ways for an individual to make their money work for them. When the companies have financial success, some of that success is distributed to the owners of the company, aka the stock owners.
Investing is a great idea for anyone trying to secure their financial future, but it’s not completely risk-free. Here are three things to keep in mind for those who purchase and own stocks.
Owning shares of a company does not equate to influence over the company
The shares that are owned by most individuals are small in number. Let’s use Apple as an example. Even if someone were to own 1 million dollars of Apple shares, they’d still only own a minuscule percentage of the company. This means that most shareholders have almost no influence over the day-to-day operations of an organization.
The one exception is if a stock has “voting rights.” “Voting rights” means that stock owners can vote for the Board of Directors, who indirectly controls the organization by making decisions on who to hire at the C-Suite level.
Stock market crashes are a reality
People invest in the stock market because they expect it to go up over the long term. After all, if the stock market went down consistently, there’d be no point in investing money into it. While it’s true that the stock market does tend to rise over a long time frame, this doesn’t mean that there aren’t occasional crashes.
A stock market crash can mean that an individual’s stocks drop in value anywhere from 10% to 50%, often over the course of just a few days. When the stock market crashes, it’s important to hold onto stocks and ride out the crash. Eventually, the stock market recovers and reaches new highs, but if an individual sells their stocks when the crash occurs, their losses are permanent.
Compounding interest is magical
A hallmark of the stock market is compounding interest. Compounding interest essentially means that stock market returns grow in a compounding, not linear, fashion. All this really means is that no amount of money is too small to invest. While it may seem as if $30 a month is so small an investment that it’s not worth it, the reality is far different.
$30 a month for 30 years is an investment of $10,800. At a return of 6%, after 30 years have passed, one can expect their $10,800 investment to now be worth over $30,000. That’s a $20,000 bonus simply for investing $30 each month!