Here’s what you need to know before investing in the stock market

Financially Inclined S1 Ep6: Stock market basics Transcript

Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.

INTRO

(MUSIC: Fun, upbeat music plays)

Yanely: What’s up everybody. I’m Yanely Espinal. Welcome to Financially Inclined from Marketplace. We’re sharing money lessons for living life your own way.

(Title card saying “Financially Inclined” appears)

Yanely: We’re getting into a pretty big and at times stressful topic, which is the stock market. The stock market is basically a marketplace where investors can buy and sell parts of publicly traded companies. That way they can participate in the growth and success of those companies. Investing in the stock market has been one of the greatest ways to build wealth over time. And when I say over time, I mean it. Because this is not a get rich, quick type of strategy. Investing in the stock market is something that will serve you if you’re in it for the long haul. So keep that in mind. But how does somebody even get started with the stock market? At first, it can feel really confusing, and there’s so many terms that get thrown around, like, what’s the difference between a stock, a bond, and an ETF? Well, don’t worry, because we’re gonna break this all down with one of my best financial friends, Delyanne Barros. Delyanne is a money coach, and I love her TikToks about investing.

Delyanne Barros (TikToks): If you have a 401 K and an IRA, which one should you invest in first? // Here are four investing mistakes that you should absolutely avoid, especially in 2023. // Why do we use a Roth IRA? To save on taxes. The money that goes in is post tax, and then the money that comes out, all of the growth and the compounding is tax free, at 59 and a half.

Yanely: Delyanne makes learning about the stock market fun and simple. So let’s get into it.

STOCK MARKET BASICS

Yanely: Tell us about how like how did you get into investing in the beginning.

Delyanne Barros: Like most people, it was introduced to me through the workplace. So I got, you know, my fancy new lawyer job, I was like, “Oh, I’m gonna get my big fancy paycheck.” And then they asked you that question “Well, do you want to sign up for our 401k?” Right? And I’m like, 401 what? So nobody really explains it to you, right? They’re like, “Oh, you know, it’s like this retirement account.” The minute you hear retirement, and you’re 24,25 years old, that sounds like a later problem. That sounds like a future me problem, not a now me problem. So let her handle it. You know, I need to pay off these student loans, I gotta get a new apartment, I gotta buy my new clothes for my new job. Those are the things that you’re more concerned with. So you tend to put that in the back burner, which is kind of what I did. I sat on it for like three years. Finally, I had an HR manager come to me who was, you know, a woman of color. And she said, “why are you not participating in the 401k?” Do you realize that we put money in there for you. That you are leaving money on the table. When she when she worded it like that I was like, oh, did not realize that. And she explained, you know a little bit about how this grows over time. I was like, “Okay, this sounds good to me.” So then I started opting in, you know, enough to get the match, the free match money. And it started to grow slowly, slowly over time. I learned what an index fund was, then I learned what a brokerage account was, then I knew what a Roth IRA was. That stuff came way, way later. And I was living in New York City at the time, right? In the Mecca of the financial industry, not knowing any of this stuff. So I realized I’m like, “Oh, I don’t know this stuff. I’m sure there’s other people who just don’t know it either.” Like, that’s crazy, right?

Yanely: But let’s take it just to the basics, like, what is the stock market? And what is investing?

Delyanne Barros: Yeah exactly. I was thinking, I was like, oh, let’s come up with like a fun analogy for the stock market, because I like analogies. And I’m a visual learner. So I’m like, okay, think about buying a single stock in a company like downloading a single song off an album, right? So if somebody told you, hey, there’s a new artist coming out, and I want you to pick the one song that’s going to be their biggest hit. If you choose correctly, you’re going to get a piece of the royalties of every, you know, money.. every piece of dollar they make, you’re gonna get a little piece of it. And you’re like, “Alright, I’m in this,” right. So you’re listening to the songs, and you’re like, “Oh, this is a good one, I think this one’s gonna hit” and you’re trying to choose the winning one. And your chances are, if there’s 12 songs on that album, 1 out of 12 that maybe you’ll get it right. And you’re like, “Yes, I’m set for life.” And maybe you get it wrong, and you’re out of luck. So that’s the equivalent of buying a single stock. Putting all of your money into a single company in the stock market, right. In the stock market, think about it exactly what it is: it’s a market. There are people selling stuff and there’s people buying stuff. And they’re constantly buying and selling off of each other. So you go on the market and you say, “Okay, I want to buy a piece of Amazon,” you go and you buy a little piece of Amazon. The problem with that, like the song analogy is, you don’t know if it’s going to be the winning song.

Yanely: But then there’s so many things that you can buy besides stocks that then it kind of feels a little more tricky. Like there’s stocks and then bonds and there’s, like you said, index funds, and even ETFs, and mutual funds. And there’s even mix of those things together. So can you tell us a little bit about some of those other components, besides stocks that a lot of young people probably hear about?

Delyanne Barros: Stock is the first thing everybody hears, which again, is like a piece of the company. So the one song in the album. And so what I would want to do, instead of taking that bet, where you’re like, ooh, pick the one winning song. I’m like, “You know what? I’m gonna pick the winning album.” Because then I own all of the songs, the ones that are going to be the big hits, and the ones that are not going to do so great, but I’ll still come out a winner in the end, because I’m going to… there’s going to be a winner in the mix in there somewhere. That’s the equivalent of buying an index fund or an ETF. You’re basically owning a giant collection of every company that is traded on the stock market. So you’re not putting all your your bet on one company. Instead, you’re like, “I’m going to own all of them. Gve me the good, give me the bad, give me the mediocre, give me all of them, and I will get the average out of it.” So that’s the index fund. ETF bonds, which is basically you are lending somebody money, and they are paying you interest for lending them money. So it’s like an IOU, right? So… and where can you do this? Well you can be lending money to the government? That’s it’s such a weird thought. So think about it, your like, “what I’m lending money to the government? The government needs to give me money.” So you lend money to the government, and they will pay you some interest. Now, they’re not going to pay you a bunch of interest, but they’ll pay you some. But what’s the trade off? Risk. Whenever there’s something that’s higher return, it’s higher risk. So it’s very important that everybody understand that these things have different risk levels and what do you think is appropriate for you?

Yanely: And when you say risk, you you mean that like, you could lose money? Because I think is what scares people. So let’s talk about that?

Delyanne Barros: Yeah, I often get panic messages from people are like, “Oh, my God, I put $100 in. And now I logged in, and it says, $92.06. Where’s the rest of my money? What happened?” And people will be panic, and they’re like, “I’m gonna pull the money out, because I don’t want to lose any more money.” Technically, and this is hard for people to accept, but they have not lost any money until they’ve sold, right? So yes, the balance in your account can jump up and down. But it’s not yours until you hit that big sell button. Like the money is just sitting in your account, it’s jumping up and down in value, which is totally normal, that’s what the stock market does. It does not just go up as many people would like to believe. And what you’re trying to understand, again, is that, oh, I’m in it for the long term. I’m here this money is in here for 10,15, maybe 20 years. And in that period of time, I will make more money. But in between that time, there’s going to be periods that are up and down. And you that again, that’s like the cost of being an investor. You have to ride that roller coaster of the stock market in order to get those returns. So you kind of have to have a bit of a strong stomach. And I think that’s again, a skill that you can build over time especially if you start really young. The older you get, you’re going to be more resilient, and you’re going to be like, Oh, I’ve seen this before, this is familiar. This happened to my account, it went down, but then I remember it went back up and then I made more money. And having that experience is going to make you a better investor in the long term.

Yanely: Okay, so who is allowed to do this? I think when you’re starting to learn about this stuff, it literally can be so confusing so who has access to it, you know, to even start?

Delyanne Barros: If you’re not 18 yet, you’re not going to be able to go and open this account yourself like 100%. But your parents can do it for you. Your parents can open what’s called a “Custodial Roth IRA” for you, right? Which is just a fancy account, that means, “hey, you’re gonna put money in this account, and it’s gonna grow tax free.” Right? And it’s for your retirement. It’s literally IRA stands for “Individual Retirement Account.” And Roth means it grows tax free. So your parents can open this account for you and you can start funneling some money in there and start buying your stocks or index funds or ETFs, whatever it is you want to do. And then at 18, that account transfers over to you and you are now the owner of that account.

Yanely: I know that there’s going to be teens out there who are like, “No, I don’t want my mom and dad to be involved in my money, with my account, none of that. So I don’t want the custodial thing.” But then so how do they navigate that if maybe the parent isn’t the person that they want involved? Does the custodian have to be the parent?

Delyanne Barros: So it can get very complicated. So I’ve had like people ask me “oh, can the grandparents do it? Can a tia do it? Can I cousin do it?” And I’m like, technically you may be able to do it, but it might complicate things. So usually you want like the legal guardian, the person who’s going to be filing taxes, you know, on behalf of that dependent to do it.

Yanely: How do you know what brokerage account is actually a good one? Like, what kind of research do you do? Are there specific questions that you’ve got to make sure you ask?

Delyanne Barros: So I tell people to make sure that they’re federally insured because brokerages also have to be federally insured, just like banks have to be. They’re all extremely similar. What matters most is not really the brokerage that you use. What matters most is the type of account that you open, and the things that you buy inside of it, and if you actually leave it alone, and let it grow and compound. Like that’s the stuff that’s going to make an impact. I think unfortunately, there’s always like a new brokerage popping up that’s trying you know, entice especially younger people. They’re not necessarily the best place to start, right? Instead, you want to be somewhere that’s very established, that’s been around for a while, that isn’t just like a fad or trend, because you’re putting your really hard earned money in these places, and you want to make sure they’re not going to go bankrupt and disappear. Another thing that I love about how things have changed so much in the last like 10 years, back in the day, you actually had to get on the phone girl. You actually had to get on the phone and ask a broker, “hey broker, can you go buy me X number of shares.” And you had to pay that broker on the phone, a big commission to go and type on his gigantic computer, or it was even on paper, they would just have to write out a ticket and be like, “hey, so and so wants to buy this many shares.” (Audio from brokers buying stocks) All of that has changed now. It’s all automatic. You can literally do it on your phone. You could be like, chillin on your couch, and boom, buy an index fund. Like that’s how accessible it’s become. So anybody, if you’ve got $1, you can log in, open an account which is free to open these accounts. What you’re paying for is to purchase the actual investment, right? You’re paying like, you might be paying a little what’s called an “expense ratio,” which is a fee to purchase this index fund. And imagine having a piece of the entire stock market with something like $1 or $5. It’s wild.

Yanely: So technology definitely made it easier. But even now you’re talking about like, “oh, on your account, you can be chillin and open an account.” But like, where do you go? To the same account where you have a checking account and savings account? Like how do you actually start maybe a couple steps for really new beginners.

Delyanne Barros: I tell people to avoid banks, and to avoid insurance companies, because usually they’re going to charge more fees. Instead, what you want to do is use something like a discount broker. Somebody like a Fidelity, a Vanguard, a Charles Schwab, where they are specifically in the business of being brokerages. So that’s the first thing. You go on the website, and you find these companies, and you literally just click on a button that says “open an account.” And it’s going to ask you very basic information, name, date, birth, you know, all this stuff. Set it up and then it’s going to ask you to connect your account, your banking account, your checking account, to this investment account so that you can transfer money from your checking to this investment account. But it doesn’t stop there. A lot of people make this mistake. They’re like, “Oh, I put money in my investment account. I am investing. I am done.” And I’m like, no, no, that’s not the last step. The next step is now you have to buy the investment, right? The investment account is not the investment, it’s what you buy inside of it and that’s where you get into the whole menu of options where people get very overwhelmed. And then they’re like, “Oh, my God, there’s a million things in here.” And that’s why I tell people that instead of trying to choose the winning investment, you buy the whole thing. And that’s why I personally invest in index funds and why I recommend that people do that too.

Yanely: Are there places or blogs or sites that you know you like and trust where you can go to find out a lot of this research that’s already done?

Delyanne Barros: Yeah, I mean, I love you know, Investopedia, NerdWallet, MarketWatch. A lot of these places have a ton of information like really readily available. Like, where’s a good place to open a starter account? Like I just started investing, I’m brand new, where do I go?

Yanely: So let’s talk about like, what are some things to consider when you are thinking that you might be ready to start investing? Like, what if you just signed on for some student loans because you’re about to start college in a couple months? Like if you have debt now, technically, right? Should you still consider investing?

Delyanne Barros: When you’re heading to college, the most important thing you should be focused on is keeping your debt as low as possible. More than anything. The first thing I tell everybody is you better have that emergency fund, right? Which I prefer to call a solution fund because that’s what money is for, money is for solutions. And you really should have that established before you invest your first dollar. So we want to make sure that you have at least three months of expenses in that bank account. And that means you know, the expenses that you’re responsible for. So it’s not three months of income, it’s three months of expenses. So I don’t think college students are out there pouring a ton of money into their accounts. Probably what’s going to happen, especially when you get your first job out of college, you’re going to be offered the first account that I mentioned, which is a 401K, which is an account that’s offered by your employer. And that’s the most common one is a 401k. But there’s many others that are similar like a 403B, 457. But they all work generally the same. So if your employer is offering you this, you already know, “oh, I’ve heard this before. A 401k is an investment account. It’s a retirement accounts, I can put part of my paycheck in there and it will grow. And I can pull money when it’s time to retire. Sweet, you know that one. The other one is, yes, the Roth IRA. You can now open it yourself. You don’t need your parents anymore. You can either open a new one, or you can keep the one that your parents open for you and manage it for yourself. And then the last but not least, is the vanilla you know investment account, which is just a regular brokerage account where there are no rules to this. You can put as much money as you want in it, you can take it out whenever you want, and there aren’t as many restrictions as retirement accounts. But you’re also not going to get all the tax benefits. So you always have to remember there’s like trade offs with everything. So it’s really important to learn what all of these different accounts do so that you can create a nice mix. And you can, each one has a different purpose, right?

Yanely: Yeah. It’s so funny. As you’re describing this, I feel like I’m learning the rules to monopoly. Like, we just need like a stock market like board game, because then once we learn the rules we can play.

Delyanne Barros: Exactly! No, that’s exactly it. And what I tell people is… I think when people hear investing, especially the first time they’re like, “ooh, math.” Like, you know, they get really freaked out. But I’m like, this is actually 80% vocabulary. And the words all sound really overwhelming right now. But I’m like, y’all, once you start getting used to these vocabulary words, you are literally going to learn the language of investing, and it will become so much easier. And you’re going to have to hear these words over and over again, just like with the new language, right? So don’t freak out if you’re like “Roth what? 401 what? It’s like it is… I had to listen to this stuff over and over and over again before really sunk in.

OUTRO

Yanely: Alright, y’all, even if you’re not necessarily ready to invest money in the stock market right now, it’s never too soon to learn the language of investing so when you are ready, the process won’t feel so intimidating. Try writing down some of the stock market terms we learned like stock, bond, ETF, and write them with the definition and some examples for each. Bonus points, if you let me know in the comments which investment do you think it’d be best for you and why? Okay, so this is our last episode of the season, but I’ve loved bringing you these money lessons I wish I learned earlier in my life. Hopefully you love them too. But don’t worry, we’ll be back soon. And before you go, we would really love to learn more about you, our financially savvy listeners. We’ve got a really quick and anonymous survey that you can take. Just click the survey link in the description box below to complete it. You’d be doing us a huge favor. So thank you very much.

CREDITS

Host – Yanely Espinal

Senior Producer – Hayley Hershman

Video Editor – Mallory Brangan

Sound Engineer – Gary O’Keefe

Director of Podcasts – Bridget Bodnar

Executive Director – Francesca Levy

General Manager – Neal Scarbrough

Special thanks – Sy Syms Foundation

Theme Music by Wonderly