🎙 Investing in the stock market is a great way to make passive income and build your wealth. But for beginners it can be scary when you don’t know how to make easy money while avoiding the risks. 🤔
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Hello, friends! And welcome back to Girl on FIRE, the financial independence podcast for independent women.
My name is Priya, I’m a Chartered Accountant, an analyst and the creator of Paper Money Co.
I’m also a fierce financial feminist and the host of this podcast. I believe that a woman who is in control of her money, is in control of her life.
This week, we’re going further into the world of investing — we’re going to be talking about stocks: what they are, how they work and how to make money from them.
Now, this topic is actually going to be split into two episodes because it’s a lot of information and I’m also testing out whether you prefer listening to shorter or longer episodes.
Shorter episodes are always easier for me to record, so I want to see if it works for you as well.
I’m such a huge introvert that even spending an hour talking to myself is super exhausting!
This episode will be part 1 and part 2 will come out next week. Part 2 will be all about risks and how much you actually need to start investing in the stock market.
As always, Girl on FIRE is about learning, so grab your favourite notebook or journal and take notes as you listen. The transcript is up on my website — papermoneyco.com — as well.
But before we really get into it, I just wanted to let you know I’ve put together an Investing Starter Guide which you can get for free on my website, papermoneyco.com.
It walks you through the steps you need to take to get yourself and your finances ready for investing.
It covers budgeting, emergency funds, managing your credit and gives you a clear step by step checklist to get ready for investing. So, I highly recommend you go and check that out.
Okay, so let’s dive in!
Too scared of risk to invest in the stock market
Now, investing is really scary and risky for a lot of people. Especially when you first start investing in shares, seeing the stock market go up and down can make you queasy.
No one likes to lose money and we think that it’s safer to just keep our hard earned money in a savings account.
And there’s no judgement here, Girl on FIRE is a judgement free zone. I was like that, too.
I made my first investment at 18, literally the day I could make a CommSec account, I did.
And I was so terrified of the idea of losing money that I just kind of froze and didn’t really try again until I was older.
I just thought that I didn’t have the stomach for something like that. But I was a hard worker.
And my first job out of university had an entry level salary but I knew that it was just my starting point and that my income would increase over time.
I thought I’d be okay, I’ll just work and then I’ll retire and then I can do whatever I want.
Well, it only took a few years of working for the man to realise that I hated working for the man. I hate having a boss and being told what to do.
I hated letting someone else decide when I woke up, when I went to bed. Where I had to be every day, what I could wear. When I could take a holiday, whether or not I could take a nap in the afternoon. I hated it.
And I’m really not interested in spending 40 years of my life chained to a desk just so that I can relax in the 20 years I have left before my time runs out.
I became so obsessed with the idea that I was running out of time. I had all these things that I had always wanted to do and I was just putting it off until I retired and had more time.
And I know that’s something a lot of people do, so I’m in no way alone in thinking that way.
And to be honest, I frequently have these moments where I freak out because I realise that I’ve only got a certain number of years left and I haven’t done as much as I would have wanted to.
Not investing is a huge risk
But that’s when it really hit me that yes, investing carries some risk, but the biggest risk is trading hours of my life away to pay the bills.
Or expecting to retire at 65 while having all the time and money and energy to do everything I’ve always wanted to do.
Having good health at 65 to enjoy my freedom. Even banking on making it to 65 at all is a risk.
I realised that not investing at all is even more risky than investing. And I can more money, but I can’t make more time.
So, that’s when I decided that I was going to take control and really make my dreams of being ‘work optional’ come true.
That’s something we talked about way back in episode 1, so you can go back and listen to that if you haven’t already. That’s when I really started to focus on stock market investing.
But the whole point of me sharing that story is this — it’s okay to be scared, but you have to understand that not investing is a huge risk.
And the consequences of not investing, like working until your dying day, is not something you can undo.
And while it’s okay to be scared, you’re not a Barbie doll. You can learn about investing. The more you learn, the less scary it becomes.
So, that’s what we’re doing today and we’re going to keep doing it. Learning never stops for Girls on FIRE.
Okay, so that’s the end of story time and my little pep talk so let’s dive into this episode and talk about stocks.
First, what are they and how do they work?
What are stocks / shares?
The best way to understand what stocks are is by picturing a decadent chocolate cake. Imagine that a company is a chocolate cake.
That cake can be cut up into slices. And those slices can be sold at a market called a stock exchange. I can buy and own a slice of that cake.
So, let’s say I buy 3 out of the 10 slices of this chocolate cake. Don’t judge me, I like cake. That means I own 30% of that cake.
I can then either keep my slices and make money as they become more valuable, or I can sell them.
But I own a portion of that cake. So, when the cake makes some profit, I get a proportion of it as well.
Companies work in the same way. They can be split up into individual slices called shares that you can purchase and own.
And owning those slices gives you a claim over the company’s assets if they go out of business.
And it also gives you the right to receive a portion of their profits as income, which we’ll talk about a bit later in this episode.
You can either hold onto those slices to keep earning that income and keep making money as the value of the slice goes up. Or you can sell your slice to other investors.
Now, because you’re one of the owners of the company, you also get a right to vote when the company makes decisions.
Something to note here, though. Those individual slices that a company is broken into? Those are called shares. And a collection of shares is called stocks.
Most of the time, though, the words share and stock are used interchangeably and they refer to ownership of a company.
Another thing to note is that there are different types of stocks, and the different types give you different rights.
But most of the time, you’re trading common or ordinary stock, so that’s what we’ll be talking about in this episode.
So, why do companies issue stock? Why do they allow people to own a piece of them?
Companies issue stock as a way of raising money to fund their growth or their expansion.
So, if a company issues 500 shares at $2 each, that means the company is raising $1,000 to reinvest into the business.
Now, they only raise money when shares are issued for the first time. So, when you buy and sell shares from other investors on the stock market, the company isn’t getting that money.
But the value of the company changes depending on how the value of its’ stock changes.
And a lot of the time, that depends on what the market and what investors perceive the company to be worth, what they perceive it’s stock to be worth.
What is the stock market and how does it work?
Now, in a very simple definition, shares are bought and sold on a market called a stock exchange. So, in Australia we have the Australian Stock Exchange, the ASX.
But in the US, there are multiple exchanges like the NYSE or the NASDAQ.
When a company “goes public” or has an IPO (that’s an initial public offering) that means they’re listing themselves on the stock exchange for the first time.
And once that’s done, people like you and me can buy and sell those stocks on the stock exchange.
Now, the stock market isn’t Maccas or Kmart, it’s not open 24/7. Normal trading hours for the ASX are from 10am to 4pm on weekdays.
So, that means you can buy and sell stocks between 10am and 4pm on weekdays. And during that time, share prices can move and change as well.
Now, to make trades on the stock market, you need a broker. A broker executes trades based on your instructions. So, you’ll need to do some research to find a broker you trust when you start investing in the stock market.
I actually went over the 7 key things you need to look for in a broker in episode 3, so be sure to check out that episode when you’re looking for a broker.
How do you make money from stocks / shares?
When it comes to investing in stocks, there are two main ways you can make money — from capital gains or from dividends. So, what are they?
A capital gain is the profit that you earn from selling something at a price that’s higher than what it cost you.
You’ll earn a capital gain when the value of a stock you own increases higher than the price that you paid for it.
Now, that gain is unrealised while you still hold the stocks. Because the stock price can still change. Those gains are only locked in when you sell the stock.
So, for example, if you purchased 100 shares in PMC at $1 each, and then the stock price increases to $1.20, then you’ve made 20 cents on each of your 100 stocks.
So, in total, you’ve made a gain of $20. Now, the opposite happens if the stock price drops below what you paid for it.
So, for example, you’ve just started investing in the stock market and you own 100 shares in PMC that you purchased for $1 each. And then the stock price drops to 90 cents.
In that case, you’re making a loss of 10 cents per shares which in total is $10.
Now, the important thing to note here is that the gains and losses in these examples are unrealised because you still own the stock.
The stock price can move up and you can make a higher gain, or it can drop and you make a loss.
Once you sell your stocks, the gain or loss you’ve made is locked in. Any gain or loss becomes real once you sell.
But until you sell, things can still change. That’s why you’ll hear people saying that you only lose when you sell.
So, that’s the first way you can make money on the stock market. If the stock price increases above what you paid for the stock, you’ll make a capital gain.
Now, the other way to earn money on the stock market is through dividends. Companies pay a portion of the profit they earn to their shareholders, their owners.
So, by owning shares in a company, you’ll earn a portion of their profit. That payment is called a dividend.
Dividends are issued as a certain amount per share, so for example, 50 cents per shares. So, the more shares you own in that company, the higher your dividend will be.
Dividends are an amazing thing. When you get your first ever dividend check, you realise how easy it was to earn that income. All you did was buy something and hold on to it, and someone is paying you for it.
So, as far as passive income goes, dividends are great. You don’t have to go and work for that company to earn an income from it.
And that’s a fantastic reason to start investing in the stock market.
Most companies pay dividends quarterly, and the amount that they pay will usually depend on how profitable they were during that quarter.
So, for example, most companies paid a lower dividend for the first quarter in 2020 because their profits were lower due to the pandemic.
Now, the important thing to note here is that most of the time, dividends aren’t guaranteed.
Companies don’t have to distribute their profits back to shareholders. Especially for younger companies that are growing and expanding, they can choose to keep those profits to reinvest in the business.
So, if you want to create an income stream from dividends, you’ll need to be investing in companies that have a proven history of consistently paying out dividends.
What are the benefits of investing in the stock market?
Okay, so in the next part of this episode, let’s talk about some of the main benefits you get from investing in the stock market.
Good historical returns
The biggest benefit is that the stock market on average over the long term yields great returns.
Now, of course this changes depending on which stocks you’re invested in and how your portfolio is structured.
And this can change from year to year. You can have a couple of terrible years, followed by a couple of great years.
So, that just goes to show you that buying and holding for 30 years gives you a fantastic return, even though the market can fluctuate wildly in the short term.
Because 2020 was a dumpster fire. And 2008 was a dumpster fire. But over the course of 30 years, you’re still making a great return.
This is how people retire, friends. No one is going to give you a loan for retirement.
And for most of us, with slow wage growth and inflation, it’s impossible to just save up for retirement.
It all comes from investing. It comes from being able to grow your money. Think of investing like money alchemy. You make money from money.
Now, the important thing to note here is that past performance doesn’t predict future performance.
That’s a mistake that a lot of new investors make when they’re getting started with stock market investing. Especially if they go into it without understanding it.
But history has shown us that over time, as economies grow, the stock market continues delivering positive returns.
Another great benefit of investing in the stock market is that it’s highly liquid. So, what is liquidity?
Liquidity is a measure of how quickly and easily something can be turned into cash. The faster you can turn something into cold, hard cash, the more liquid it is.
So, for example, stocks are really liquid because you can sell them on the market and get cash in the bank within a couple of days.
But something like real estate, however, has low liquidity. It can take months to sell your house and actually receive the cash for it.
Now, with stock market investing, it’s best to follow a long term buy and hold strategy. So, your money has time to just sit there making more money.
But if you did have to withdraw your investment and get your cash back, you could do that within a couple of days.
Of course, I recommend a long term buy and hold strategy, that’s what I do with my own investment.
And yes, the option to withdraw is there, but I also don’t want you to freak out when you first start and withdraw your money the moment it gets a little dicey.
If you stop before you really even start reaping the benefits of stock market investing, you won’t make any money.
So, investing in the stock market has the benefit of being liquid.
Get franking credits when you earn dividends from Australian companies
When it comes to investing in the Australian stock market, one of the great benefits is that we earn franking credits when we receive a dividend.
Now, franking is Australia’s dividend imputation system and it’s a huge topic on it’s own that we’ll cover in detail in a future episode.
But for now, what you need to know is this. Franking credits are essentially a credit that you receive on your taxes when you earn a dividend.
And you get that credit because the company that you are a part owner of already paid taxes.
So, companies pay dividends from their after tax profits. That means that they’ve already paid taxes on the money they used to pay out dividends.
And since you’re an owner of that company, you earn a credit on those dividends because the company already paid taxes on that money.
In Australia, we pay taxes on all our worldwide income. So, when you earn a dividend, you need to pay tax on it.
But if your dividend comes with a franking credit, then you only have to pay the difference between your personal tax rate and the company’s tax rate, which is currently 30%.
This is another way that the government incentivises people to invest in Australian companies.
And it’s also to avoid the double taxation of dividends. Because if a company pays you a dividend from its’ after tax profit, and then you pay taxes on the dividend itself, it’s essentially being taxed twice.
So, by giving you a credit for the tax paid by the company, you only have to pay the difference in your taxes.
Franking is a pretty complicated topic and I’ve only spent a few minutes going through it, but what you need to know for now, is that franking is a benefit when you’re buying shares in Australian companies.
There’s no discrimination when earning income from the stock market
Moving on, one of the great things about making money on the stock market is that everyone is equal.
The amount of money you earn will be determined by which companies you’re invested in and how much you’ve invested.
No one knows if you’re a woman, if you’ve got dark skin, no one knows if you’re Asian, or if you’re an immigrant or what your pronouns are.
You’ll get the same dividend per share and the same capital gain as all the rich white men.
There’s no gender pay gap there. No one can pay you less for being a woman.
And you also don’t need to be wealthy to start investing in the stock market. Any one can do it and anyone can become a millionaire.
Can create income stream
Shares are also a great investment if you’re looking to create an income stream. You’ll just need to make sure you’re invested in companies that consistently pay dividends.
The only thing to keep in mind here is that dividends aren’t guaranteed. Companies can choose not to issue dividends if they want to keep the profits for growth, or if they’ve been struggling.
Investing in stocks creates passive income
Having said that though, when you do earn a dividend or even a capital gain, it’s passive income.
It’s money you earned by doing nothing, which is a huge benefit. You just have to own the shares, you don’t have to do anything else. So, you earn money with zero effort.
The only effort you’d need to put in is deciding which stocks to invest in and managing your portfolio.
When you first start investing, that can be a lot of effort but as you learn more about the stock market and investing, it gets easier.
Not only that but you get to decide how much effort you want to put in to managing your stock portfolio. But you get a piece of the company’s profits without having to work for them.
And I love that. I can make money from Woolies and Commonwealth Bank and I don’t even work there.
Dividend reinvestment plans
Another great benefit of investing in stocks is that you can opt in to a dividend reinvestment plan.
Now, we talked about what dividends are a little earlier in this episode. It’s a payment you receive from a company when it pays out a portion of its’ profits to its’ shareholders.
But when it comes to receiving your dividend, you have two options. You can either choose to receive it as cash, so you’ll receive a bank transfer or a check.
Or, you can choose to opt in to a dividend reinvestment plan. A dividend reinvestment plan, usually called a DRIP, is you telling the company that you want to use your dividend to automatically purchase more shares.
So, you’re choosing to reinvest your dividend back into the company instead of receiving a cash payout. You want to use your dividend to buy more slices of the cake.
Companies who offer DRIPs incentivise them by allowing you to buy those additional shares at a price that’s lower than the current share price.
So, not only are you reinvesting your dividend back into the company, you’re doing it at a discount.
And for the company, that’s great news, because your reinvestment comes straight back to them, instead of you taking the cash and investing it in another company.
When you opt in to a DRIP, it’s also automatic. So, you have to opt in, but after that you don’t have to do anything.
You’ll receive a notice telling you how many additional shares you own, but you don’t have to do anything.
Now, this can be a little confusing when you first start investing in the stock market. But there are a registry companies that keep tracks of shares and dividends.
And when you purchase shares in a company, their registry service will have an account for you under your Holder Identification Number.
When you set up that account and log in, you’ll be able to opt in to DRIPs, and set bank account details for where you want any cash dividends to be paid.
Can be quite affordable
Moving on, to the last benefit on my list — stock market investing can be quite affordable, especially if you choose the right broker.
It’s a lot more affordable to invest in shares than it is to invest in real estate. Because you don’t have to pay stamp duty or anything like that.
I’ve got thousands of dollars invested in the stock market and I’ve only ever paid $9.50 for each trade I’ve made.
And that’s really not a lot of money to spend to invest and grow your wealth.
So, if you do your research and choose the right broker, investing in the stock market can be really affordable.
Next weeks’ episode
And that’s all I have for you Girls on FIRE today! That’s part one of how to make money on the stock market.
My challenge for you this week is to head to papermoneyco.com and get your copy of my Investing Starter Guide.
It’s totally free, you just need to enter in your email address and I’ll send it to you. And then I want you to start working through it.
It’ll give you a plan to follow, step-by-step to get ready to start investing and building real wealth.
On next weeks’ episode we’re going to continue with this topic and talk about the risks of investing in the stock market.
We’re also going to talk about how much money you need to start investing in the stock market.
It’s going to be a super interesting episode so you’re definitely not going to want to miss it.