How to Earn Free Money
Banks are cheating you. No, I’m not talking about the risky behaviors they’ve taken or the financial crises they’ve helped create. I refer to their incredibly low interest rates. While banks should be compensated for keeping your money safe, they can use said money by loaning it to other customers(mortgages and other investments). In other words, they make a killing from your money, while you get a measly 1% at best. However, there is an easier, far more profitable option found in the stock market.
We’ve discussed how owning pieces of a company does have some value. But, that was a bit of a lie. To get real exposure to individual companies, you need a ridiculous amount of money; for a single share of Google, nearly 800 dollars is going to come out of your pocket. So, is the stock game exclusively for the rich?
Thankfully, no. Even the average Joe can get exposure to a variety of companies through mutual funds or ETFs(exchange traded funds). Investors pool together their money to buy more shares collectively, and then sell shares of this group of companies. Anyone can buy shares of this group, and then own little pieces of all the companies in the mutual fund/ETF. As we mentioned in the previous article, there are no shares of stock exchanges like the S&P 500 or NASDAQ, but investors can invest in SPY or VOO, ETFs that contain a weighted % of all the companies in these exchanges(investors essentially own shares of the S&P and NASDAQ). As well as fairly cheap, these investments are far less risky; if one company in the fund does badly, it won’t have much effect on the overall fund. However, the opposite is also true; unless the stock market as a whole makes gains, your shares won’t change much in value. However, the stock market does traditionally rise in value over time, so you will likely benefit.
Furthermore, lots of securities will pay out dividends, which are no-strings-attached payments to an investor. Used to attract investors and show the company’s strength(they’re definitely financially solvent if they can afford to give away their money), these payments alone may be more profitable than any bank account interest.
It makes sense that companies would help investors profit. You’re risking your money. While unlikely, any company has the potential to fail, and you must be compensated for the service. Furthermore, stock issues and whatnot are a great way to raise money, far cheaper than taking a loan(and paying interest!). Thus, companies still save money and we investors simply gain a little of these savings.
Overall, mutual funds and ETFs are great securities to put money into. While spreading out risk and giving you exposure to a variety of companies, they are almost always profitable in the long run. However, as we explore in the next post, the stock market as a whole can crash and leave investors in dire straits.