In the winning essay of the 16-17 age group in our Young Financial Journalist competition, Pamela Kruze looks at the role investing in stocks and shares play in helping people build wealth for their future.
Stock performance
Is it really possible to become a millionaire by the age of 30 for us ordinary people? Well Tim Grittani was able to do it by the age of 24 by trading in penny stocks.
These are stocks with a share price below £1 in the UK. ($5 USA). By trading in stocks, Tim spread his risk over a number of companies. In ten years, Tim made over $10 million; so, can we do this too? As always, it depends.
The FTSE 100 the total return index percentage change in 2020 was -11.5 whereas in 2003 it was 17.9 (its lowest in 2008 at -28.3) as expected, in an economic crisis, drastic losses are made.
However, there are exceptions like Netflix stocks which performed well in 2020 as people were stuck at home due to lockdown, so were subscribing to past time binging shows.
Investing allows people to build up their wealth which they can use to achieve their aspirations. However, there have to be cautions as everything can be lost!
The impact of Covid-19 on stocks
In the last 2 years, due to covid-19, many stocks and shares values have fallen with Marathon Oil. Corp being one of the most hard hit in 2020. Whether you decide to invest in short-term stocks depends upon how much money you have stashed away and whether you are risk averse or not.
A way around this could be to consider a longer-term investment but, the asset needs to grow in value before you can expect to sell your shares or stocks to earn a profit, so chances of becoming a millionaire by the age of 30 may be quite slim.
There is an upside. Choose well and you can use the dividend payments to boost your income whilst you wait. Before investing you need to consider your options and risks, like stockbroker costs and commissions. However, cheaper alternatives are available like Robinhood and Webull, so access to stocks and shares is now much easier.
Can you spot trends at the start? If you had joined in the mass action to short squeeze GameStop and then jumped ship before the price fell then you could have made a good return, not millions. However, GameStop is over-valued, and the bubble may burst soon.
For those risk averse, can consider safer options like a treasury gilt, but these don’t always have a great return which more riskier options may have, as the higher the risk the greater the return could be.
Therefore, those more risk tolerant can go for more riskier options. However, you still need to weigh out the risks and benefits of that particular investment before deciding whether to go through with it or not.
Where to invest your money
What about other investments? Like, real estate where housing prices are currently rising despite the COVID-19 pandemic due to limited supply and rising demand as many desires to own their own property. This asset class is very sensitive to interest rates so will fluctuate and currently interest rates are very low due to the coronavirus pandemic.
There have been crashes in the housing market, in particular the 2007/8 financial crisis therefore, if you decide to invest in real estate, you need to look out for signs that may indicate another crash, so you were prepared in case any crisis arises.
In conclusion, investments allow you to build up your wealth in the short and long-term. The value of returns depends upon fluctuations in the market therefore, if you have private shares it may be difficult to pull out in time before making a substantial loss because assets can be overvalued.
The trick is to know when to pull out, as it’s more difficult to sell private shares because, they aren’t listed on the stock market unlike public shares, therefore, should consider what safety nets are available and plan for the unexpected and ways of dealing with it to ensure your personal financial sustainability.
Not only are contingency plans important to ensure your built-up wealth is secure but, also to be aware about the protection or any compensation available on your investments as some are covered by the FSCS if the provider were to go bust or give bad advice leading to a loss.
Overall, it allows you to build up your wealth over a period of time as many options are available depending on the risk you are prepared to take, your tolerance and, financial position however, to ensure success when investing you should consider all the risks and benefits and weigh them out.
Your understanding of the market and previous failures are vital, like the housing market crash of 2007/8, therefore, if you are aware of all those factors and can create contingency plans, then you can build up wealth for your future and allow yourself as many wants and aspirations as you can.
Find out more about our Young Financial Journalist competition