The stock market has been all over the news lately, thanks to the Apple and Tesla stock splits, the race for a coronavirus vaccine and the fluctuations in the Dow. Even amateur investors are paying attention — and, in many cases, wondering if now is the perfect time to wade into the stock market.
It’s not a decision to make lightly. Buying individual stocks can be profitable, but as you might guess from the recent market volatility, it can be risky. You’ll probably want to brush up on your investing basics before taking the plunge.
Here’s what you need to know.
Linda Zhang, a senior advisor to finance company SoFi, said part of the reason we’re hearing so much buzz is that the markets have generally rebounded from their major contraction back in March.
“2020 will be remembered as a year of a great pandemic but also as a year of great recovery,” she says. “There’s a divergence between what’s going on in the real economy and what’s going on in the capital markets.”
This isn’t unheard of; we saw something similar during the Great Recession. The market crashed in March 2009, but by the end of the year the S&P 500 had more than recovered.
Back to the present. A SoFi survey found that one in five respondents started trading securities for the first time digitally in the past couple of months. A third of people who already were trading increased their activity.
So even though we’re still experiencing some scary unemployment numbers and economic downturn, the market is thriving. This is partially thanks to trends that predated the pandemic, like the rise of commission-free trading, as well as recent ones, like the Fed’s stimulus program and savers having extra cash to spend.
Investors may also feel it’s easier to get into the market right now due to stock splits at places like Apple and Tesla. Todd Lowenstein, equity strategy executive at The Private Bank at Union Bank, explained that stock splits are when a company divides its shares.
Here’s an example. Say you have one share that trades at $100, and the company enacts a two-for-one split. Now you have two shares that trade at $50. The price per share has dropped, but the market capitalization hasn’t changed.
Companies do this because, “historically speaking, if a stock price gets too high you will likely crowd out retail investors,” Lowenstein says. (Retail investors are regular, non-professional investors — not institutions.) A stock split “lowers that hurdle so retail investors, younger investors, can participate in some of these names.”
But if the market is recovering, everyone is investing and the barrier to entry is low right now, does that mean you should start buying individual stocks?
Lowenstein was not so enthusiastic about that idea. He said it’s better to come up with a long-term, well-researched investing plan as opposed to making sudden moves.
“If you jump in and jump out based on conditions right now, that’s a surefire way to lead to mediocrity or really bad investing results,” he says. “You want a plan underneath you because it’s a foundation. It’s like a balance to keep you steady during volatile times, and markets are volatile.”
Case in point: what happened last week.
He said one good way amateurs can dip their toes into the metaphorical water is through target date funds, which become more conservative the closer you get to a certain date (like your retirement year). Zhang recommended checking out exchange-traded funds, or ETFs, which are baskets of securities. Both are relatively passive investments — solid options that’ll run in the background while you learn more about the landscape and determine your risk tolerance.
“Don’t try to get into the fast lane immediately,” Lowenstein adds.
Bottom line? The markets are doing well, but that can change quickly. Though it’s tempting, you probably want to pump the brakes on individual stocks and explore funds instead.
Before you move any money around, Lowenstein recommended considering the upside potential versus downside risk. He also said to be patient and rational, not emotional, when it comes to chasing a market high.
“You want to ask yourself, am I speculating or am I investing?“ he adds.