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Financial Literacy

Financial Literacy

Home Finance Investing The Stock Market

The Stock Market

You probably go to your local supermarket (or farmer's market, if you're in California or a hipster) to get your groceries. For your stocks? You'll go to the stock market. You might not be able to pick up organic Granny Smiths, but you can buy yourself a slice of Apple.

Hmmm. Looks like they're out of kale.

In the past, you had to already have money to make money on the stock market. Back in 1970, not only were stockbrokers wearing horrible-looking suits, but they earned about $150 commission on every $2,000 exchange (yeah, there was really no excuse for their fashion choices). To buy 20 to 40 stocks (what most investors would see as a nicely diversified basket of stocks), you might have to pay several hundred thousand dollars. Then you could go dance some disco…if you still had enough cash on you to cover drinks.

Then something changed—and it wasn't just hair.

Mutual funds came along. Mutual funds bundled investments together so you could buy a mutual fund with 20-40 different stocks without having to pay commissions. For a thousand bucks, you could become an investor. Scale professional buyers negotiated commission rates, and since you were buying a bundle of stocks, you weren't paying individual commission on each one.

Mutual Funds and Index Funds

With mutual funds, even if you didn't know about stocks, you could buy investments. After all, professionals (or so they claimed) were putting together the funds. These puppies democratized stocks and made them available to the middle class (and to the average Joe who was willing to save up to buy one).

Once the yuppie craze and big hair of the 1980s faded out, computers came along, and they really changed the game. With new laws and cheap phones, the stock industry became a hybrid commodity. Managers had whole new ways of communicating, and eventually customers could buy and sell stock online relatively easily and quickly.

Enter the era of the 15-year-old buying stocks from the computer in his room.

Computers also made it harder to tell one set of managers from another. Fees remained pretty high at 1% or more a year, and new tax laws and brokerage commission loads made index funds suddenly more attractive because they outperformed mutual funds. Index funds were simply a bunch of stocks put together and exposed to a broad or sector index (like the S&P 500).

Here's where it gets exciting: index funds charge far less than 1% a year in fees, and they involve almost no gains taxes because they don't usually trade. So they just compound your investment at a rate that's pretty similar to the stock market.

There are lots of books, websites, and videos promising to tell you how to beat the stock market. And guess what? They're about as realistic as the "lose weight overnight pill" being hawked by 80s celebrities on late-night shopping channels. In fact, only about 2% of the money pros in really nice Armani suits beat the stock market.

But maybe you can. 

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