Use your timevalue (Theta)
How to make money
To improve their account balance someone has basically three options additional to working:
- Capital markets aka. Investing
- Real estate
- Working more (overtime, 2nd job etc.)
As most people don’t have enough money to buy real estate or time/energy to work more it basically boils down to capital markets. However, there are different ways to make money in the stock market, roughly spoken three;
- Starting with a big sum of money (not applicable to most and especially not to students)
- Having lots of time (theta)
- Taking on a lot of risk (e.g. betting with small sums of money on certain financial events e.g. Microsoft will reach a certain share price till the end of the week)
Make the most of your time
A big starting-sum (unfortunately!) is often not applicable to real life. Taking on a lot of risk isn’t something for everybody so it comes down to option two: make the most out of your time. Everyone is born with a given lifetime which reduces itself until we die. With capital it is the other way around. Normally you won’t have any money (or not much) unless you start to work. Therefore you can hopefully increase your net worth over time by getting a better job and/or living below your means. With that you can have a carefree (from a financial point of view) future. However, it is possible to use your given time to leverage your finances. By that I mean using your time to make money by investing. Especially young people start investing too late (or worse: never). Therefore, they throw away one of the leverages everyone is born with: their decaying time value (theta). Normally people get into investing way too late. Even if you start a few years after your first job you lose out on so much potential. Especially due to the fact that in this part of your life you probably have higher earnings than expenses. No kid, no house payment and so on. Especially from a mathematical point of view, the earlier you start to invest the more you actually benefit from compounding interest.
Lets talk numbers
By investing young, it is possible to even grow a small portfolio over time due to compounding interest. Let’s make this more practical. Just by looking at a few stocks like Netflix or Amazon one can see that these stocks have been growing immensely in the last 5 years. If you would have bought amazon one year ago you would have increased your initial position by 87%. If someone bought amazon five years ago their position would now roughly be seven times as big! In hindsight something like this is easily doable but how can someone spot a stock like this right now? This is where it gets tricky. There is no formula to spot a stock which will increase for sure. It comes down to spotting potential performers and being able to evaluate their business model. On a very basic level this is not that complicated and often enough to get a good feeling for an investment. As this is an intro article I will write properly about investment or stock picking later.
Real life example
Let’s say you spotted amazon five years ago (august 2013) but you didn’t have enough money. Lets say you only had 50 bucks a month (only invest what you cold stomach to lose). If you would have invested in amazon it would have been possible to buy one share every six months as the share price was around $300. That means you would have owned 2 amazon stocks after one year. As the stock didn’t really take of till the mid of 2015 you would be able to buy roughly 5 stocks (5*$300= $1500). This position would now be worth $7500 and therefore you would have grown your investment fivefold. Chances like that appear every day. For those who don’t feel like they want to put that much effort into stock-picking or investment picking there is a solution. Just by find an ETF (bunch of stocks mixed together) that suits your needs. Make sure it has low related costs and mirrors whatever you prefer. This way it is possible to make decent returns as well. By investing in an index like the S&P500 the initial position of $1500 would have increased by roughly 30%. If you want to have a glimpse into etf-investing performance take a look at “why investing IS important”. So even if you are not able to spot a stock (or don’t want to invest the energy), just by making the most out of your (money’s) time you might be able to increase to balance.
Taking a step back one might have different problems with the example above. By investing in only one stock the risk would be quite big. Due to the size of the portfolio diversification would not really have been possible. However, these are blue chips stocks I am writing about. Blue-Chip is a term for a well established and known company. Normally they have a big market cap over one billion $. They supposedly are in the top 3 or 5 of their respective sector. As such those stocks are seen as non-volatile and therefore not that risky. It comes down to the question if you would have been able to take the risk. If not you could have tried the riska-averse-route and could have invested in an index. The other problem with investing small amount of money are the fees. Normally, for every transaction (depending on the website you trade from) one has to pay a fee. Those are often a small percentage (0.5-1%), a flat amount (up to $30 depending on your website/broker) or a mix of both. Small-sum-investing would have been easily killed of by that, however, since early 2013 there even exist well established brokers who offer a zero-fee policy. As far as I know those are only useable from the states. Despite that, low-fees brokerages exist in the EU as well and by saving and only investing for example every fourth month, small sum investing can easily be viable (& profitable).
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