When COVID-19 struck the U.S. at the beginning of 2020 and stock prices plummeted, many people saw it as their gateway into the stock market. First-time traders downloaded simple trading apps like Robinhood and Cash App hoping to make extra money.
Many of these new traders were college students hoping to take advantage of the low stock prices, like Northwest senior Austin Sharp.
“Since the prices were low, I saw it as a good opportunity to buy stock at a cheaper price, thinking at some point the pandemic would end and the stocks would rise again. I’ve been able to make some money back, so that makes me want to keep trading,” Sharp said.
Getting into trading makes sense when peers are making money off the stock market. As more people have success, it seems like a smart option to join.
However, Northwest business professor Jason Satchell warns against this kind of thinking.
“Back in March and April, it was a fantastic time to invest money, and if you invested back then, you probably did pretty well up until this point. And I think in some ways that kind of gives a false sense of confidence because we went through what would be considered a ‘black swan event,’ and so you almost feel like this is how it is all the time, and it’s really not,” Satchell said.
Recently the market saw another flood of first-time traders flock to Robinhood in the midst of the GameStop battle. During the chaos a few weeks ago, Robinhood gained more than 600,000 new users in one day.The idea of getting rich off the stock market is alluring, especially for broke college students. The problem is that success stories are few and far between.
“If it sounds too good to be true, it probably is, and there’s not a lot of cases where you are going to find someone who put some money down and is now super wealthy. You hear about those stories from time to time, but the vast majority of the time, most people lose their money. If it was easy to trade and make money, we’d all be rich, and there would be a surefire way to do it, but there isn’t.”
Instead of taking a risk by putting your money into various stocks, Satchell suggests putting it toward an index fund.
“Buying individual stocks is not going to turn out well for you relative to buying an index fund, something that invests in a lot of companies,” he said.
Index funds invest your money into a portfolio where it’s spread out across the market into multiple stocks and bonds, earning you money over time by matching returns of whatever stock market index the index fund is associated with, like the S&P 500. So instead of trying to guess what singular stocks to invest in like Apple or Netflix, index funds spread your money out into a diverse portfolio to avoid major losses and make passive income over time.
The best part is that this smart investment strategy is affordable enough for college students to get started.
“You really don’t need that much money to get into an exchange-traded fund that tracks an index. It’d be no more expensive than going out and buying individual stocks. You could probably get in with a minimum of $250 in a lot of different ETFs, but it’s not as costly as most people think to get into an index fund,” Satchell said.
Many college students are short on money, so looking for ways to invest the little cash we have is natural. But it’s counterproductive for people with spare money to gamble on the stock market in hopes of making a big return. Instead, we should start putting our money toward long-term investments, like an index fund, where we reap guaranteed rewards later in life.
The earlier you start investing, the longer the fund has to increase in value. College students should ditch the stock game and make this investment instead.
“I hope that most students that did well are able to take that money and then stop trading it and actually invest it long term, find some investments they can put money in and sit back and relax. If you take that money and invest it in something like an index fund, by the time you get to retirement age, you should be fine,” Satchell said.