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Chris Hogan is America’s voice on retirement. He helps spread Dave’s message of financial hope to audiences everywhere. An engaging and humorous speaker, Chris is an expert on subjects like mortgages, healthcare and investing. He knows how money works, and he has a passion for helping families prepare for retirement. Chris has become a sought-after speaker who loves to challenge, empower and inspire audiences. His new book, Retire Inspired: It’s Not an Age; It’s a Financial Number hits shelves in January. Here is an excerpt from Chapter 6.
Investments are broken down into broad categories based on the type of investment they contain and the investment’s risk and return profile. Pretty much every investment you could think of falls into one of four asset classes or categories: cash, bonds, stock, and real estate.
Let’s focus on stock assets, or stock, since most people have heard of those.
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Stock represents owning little bitty pieces of a company. It’s kind of like a bunch of bricks in a building, and you own one or more of the bricks. You’re using your money to literally buy a piece of the company. Since you own that piece, you are entitled to a share of any profits the company makes. Stock prices are driven by the performance of that company. If the company’s earnings go up, so will the price of their stock. So stockholders earn money by selling their stock after it has grown because of the company’s success.
The other way to earn money from stock is called a dividend. This is a quarterly payment that some companies pay their stockholders. It’s a way to reward stockholders for sticking with the company.
How Stocks Work
Time for a real-world example.
Let’s say Bob wants to start a bicycle sales and repair business called Time to Ride. He can get the business up and running for $100,000.
The problem is that Bob only has $20,000 to invest in his business, so he issues stock in Time to Ride. He breaks the ownership down into ten shares valued at $10,000 each. Bob has $20,000, so he keeps two shares for himself and finds eight other people to invest $10,000 each. So, there are ten total shares of stock valued at $10,000 each, and the company is worth $100,000. Each share of stock represents 10 percent of the ownership of Time to Ride.
After a couple of years, Time to Ride is now valued at $200,000. So, each share of stock, which is worth 10 percent of the company, is now worth $20,000. That means each of Bob’s investors has doubled their initial investment. That’s how people make money buying and selling stocks. The idea is that you buy low and sell high, meaning that you buy it cheap and sell it when it’s worth a lot more than you paid for it.
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Stocks and the Market
You’ve probably heard the term "stock market," right? The stock market is a large group of financial markets from all over the world. It’s a marketplace for buying and selling stocks. You may have heard of the Dow Jones or the S&P 500. These are a couple of the various reports, like report cards, on the performance of all markets.
That’s what stocks are and how they work, but let me caution you here: I do not recommend investing in individual stocks! Single stocks are far too risky. It is much better to diversify in mutual funds than to put a pile of money into one particular company.
Single Stocks: The Vegas of Investing
For one of my speaking gigs, I took a trip to Las Vegas. I was sitting on the airplane one early morning in Nashville, getting ready to take off. Now, if you have ever been on one of those early morning flights, you know most of the time everyone is sleepy and quiet. But not this flight! This one was heading for Vegas! It buzzed with energy. People were high-fiving, hugging, and participating in all kinds of crazy behavior. You know why? They were all going to get rich! I will never forget the energy of that crowd when we touched down in Vegas. That little signal went ding telling us we could get out of our seats, and the seat belts were so loud it was like applause. It looked like people were being unleashed from their seats! They were ready to run to the casinos.
A day later, I got on another plane to go home from Vegas. That plane was full of the saddest, sickest group of folks I had ever flown with. Nobody was smiling. No one was talking. Not a single person got on that flight chatting or smiling or bouncing around like the next millionaire. I’m pretty sure most of those people who had gone to Vegas to win had lost money. You’ve heard the expression, "Whatever happens in Vegas stays in Vegas," right? Well, I’ll tell you what else stays in Vegas: your money!
Single-stock investing is like playing the tables in a casino—it’s a huge gamble. Everyone is looking for the next Apple or the Next Big Thing, but the truth is you can’t guess the success of companies or the growth of an individual stock. Unless you have a crystal ball and a magic wand, I’d stay away from single stocks.