Every semester, several students ask me if they should get started in the stock market by buying just one stock. Usually this question comes after the lecture in which I point out that 80-90% of professional investors and money managers aren’t able to outperform the overall market. Without repeating the entire lecture on efficient markets (exciting though that might be!), I tell them that the odds are, in general, against you when you buy individual stocks. But when asked if this means they shouldn’t buy just one stock to get started as investors, I always say “no, in fact I encourage you to buy a stock if you want to get into the market.”
Am I trying to be mean to my students? The thought has crossed my mind once or twice (joking!), but no, I truly believe buying a stock is a great way to learn about investments, no matter what age you are. Another part of the lecture I promised not to repeat in full is: always know what you are getting into. This applies to everything in life, but is particularly true in the world of finance and investments.
By “know what you’re getting into”, I mean, know what it is you’re buying, and know the risks involved. Do a little research about the company you want to buy the stock of; don’t just buy a stock because you heard some talking head mention the ticker symbol on CNBC, and certainly don’t buy a stock just because Jim Cramer recommended it, unless you are allergic to money.
So what should you do? Look for some innovative or cutting-edge product or service. For college students, this might be easier for you that it would be for me, as you encounter a lot more of these things than someone my age typically does (my students are shocked when I tell them I’m not a fashion trend-setter, though I suspect the shock might be just a touch sarcastic). Then, find out more about the company. I’ll give you a lot more specific advice on what to look for on this blog, and especially in my soon-to-be-published books.
One last thing for today on getting started, and a lot more in the very near future: go ahead and buy a stock, or two, or however many you want, but don’t put your rent money into it, nor your food/beer/pizza money nor cash you need for any other essentials of life either.
I encourage everyone to become an investor, and buying just one stock can be a great way to get started!
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