I recently had a relative ask me this question. I was telling them about a stock that I recently bought and how I was hopefully going to make good money off of it.
It’s been a good while since I’ve heard this question, but sometimes I forget that not everyone completely understands how stocks work. If you don’t know how they work then asking about how you can make money from buying them is completely understandable.
I was explaining stocks to this relative, and they were just amazed and surprised at what they were. I guess there was a day when I didn’t know how you made money off of stocks. I had to figure out what they were and how to use them. I did all that in college though. I asked questions and figured it out. This relative was out of college and I would safely call a well educated adult. How can it be that they don’t know about stocks?
How to make money buying stocks
The first thing I had to explain was that there were lots of ways to make money with stocks. A lot of it will depend on your personal choices and how you want to go about making the money. Some people like to trade stocks while others like to invest them for the long term. If you want to make money off of them though you’ll either have to sell them eventually or find some that pay out dividends.
As I got into it some more the relative said this,
“That almost sounds like you’re gambling with your money.”
I had to think for a second about what I had said to make them think that. I was talking about how you could trade a stock and how it could go up or down in value and that you couldn’t always predict which way a stocks value was going to go.
The way I said it did make it sound like gambling. To be honest, stocks can be like gambling if you do it in certain ways. If you’re inexperienced and you decide you want to trade penny stocks you might really see how much “gambling” there is when you buy a stock.
I thought about it for a second and then I figured out that I had to tell them what a stock is. I explained that it was a share into a company. When you buy a share of the company it’s like you’re buying into the company and everything that goes on with the company. Therefore if the company does well then your stock will do well. If the company fails then so will your stock.
This made some sense to them and they were much more interested in how you can make money. I explained to them that you can pick stocks after researching companies and how they are performing. If you can do this properly and invest your money wisely then you’re not gambling anymore. Instead, you’re investing.
What about how the market crashed 10 years ago?
This question was sure to come up eventually in our conversation. How can you make money if it will eventually collapse like it did before? They were right to ask this question. The market has crashed numerous time before and it will most definitely happen again and again.
Here’s the thing though. The same way that it has crashed repeatedly it has recovered and grown stronger each time. The history of the stock market has it always recovering eventually. This means that if you can buy and hold you will be fine.
This made them very interested and they wanted to buy in right away so they could start making money to help them pay the bills.
Then I had to explain that the stock I bought doesn’t have a dividend. It was a growth stock that should hopefully gain in value over time. Plus, you won’t realize any “money” per se until you actually sell the stock which I wasn’t going to do any time soon.
After hearing that they weren’t as interested about buying the stock anymore. So I asked them where they were saving their money? They told me about a CD that was getting them 1% and how they put money away in their savings accounts.
Then I had to explain that these stocks are just like saving in the bank only that I’m saving them in a different way. Instead of saving money for a long time I’m saving parts of companies for a long time. Eventually when I need the money I will sell and take some out, but until then I am going to keep saving and growing my account just like you would do with a savings account. Once again they were interested.
It’s amazing to me what some people think of the stock market. It’s not really anything confusing. All you have to do is pick good companies to invest in and continue to do so. Diversify your investments into multiple sectors and multiple companies and you should eventual do just fine. It’s really easy and everyone should take advantage of it.