Benjamin Franklin made an understatement when he said that a penny saved is a penny earned. Today, it can conceivably be said that a penny saved properly is two pennies earned. For the millions of Americans who consider themselves investors, this principle has proven to be true, even with the recent market turmoil. You do not have to be the Duke student who wants to work on Wall Street, or even who wants to go into business, to learn about personal finance and the stock market.
If you worked last summer, hopefully you can spare some of your earnings and put them to good use by deciding to save and invest. If you can part with this money for a few years, consider turning to the stock market to make this money work for you and earn a reasonable return.
Right now, you have the biggest advantage any investor can hope for: time. Because the markets historically rise in the long run, time is the best way to overcome risk by permitting you the opportunity to turn any potential loss into a gain. In fact, despite occasional years of bad performance, there has never been a 10-year period in which you would have failed to make money in the stock market.
Why would you want to invest? First of all, the market usually goes up. If invested properly, the chances of losing money are very slim. The more meaningful reason to invest stems from the amount of money you forego by not investing. Based upon historical returns of about 12 percent, $1,000 invested should double to $2,000 within six years. The only thing required on your part is to leave the money alone.
You may have heard of the phenomenal recent market returns of 30 or 40 percent, but this is not expected to continue. Returns will most likely return to previous historical rates between 10 and 15 percent, depending on the investment vehicle.
After you decide that you want to invest in the stock market, the first step is to open an account with a stockbroker. Stockbrokers can be classified into three basic groups based upon the services offered, the level of advice offered, and the costs of these services. Fidelity and Charles Schwab are large discount brokers. They are known for their low costs and high levels of customer service, but they offer very little personalized advice. Both also have extensive mutual fund offerings.
Merrill Lynch, Prudential and Smith Barney are full-service brokers that provide highly customized advice, guidance through your own personal broker and excellent customer service; you will pay, however, through higher commissions and service charges. At a full-service firm, a broker will handle all investment decisions for you.
Finally, the ultra deep-discount Internet brokers such as E-trade, Ameritrade, and DLJ Direct provide the lowest costs available but also deliver very few extra services. Some may provide research, but you are primarily on your own to make investment decisions. Mutual fund offerings also may be very limited through some Internet brokers. Whereas Merrill Lynch commissions can range from $50-$100 and Fidelity and Schwab charge around $20-$40, the online brokers may charge as little as $5-$10.
These quoted prices are typical for stock trades. As a beginning investor, however, you will probably want to start with mutual funds, which will be the topic of the next column. Opening an account is the first step to investing in the stock market. Just like buying a car, shop around for the investment account that is best for you. You may want to research the different firms to see what they offer and how much they charge for these services. Most accounts will require a minimum opening balance. This amount may be around $2,500 to $5,000 but it depends on the firm.
Finally, the University has many opportunities for you to learn about the stock market and to gain relevant experience. First, by taking Economics 83: Financial Accounting, you will gain exposure to the many investment terms and ratios used when evaluating investment opportunities. Corporate Finance, a more advanced class, is very useful for trying to understand companies and the stock market.
Another good tool is to get involved in the Duke Business Club. Through its Investments Division, the DBC has a student-run mutual fund called the Duke SRM fund. All students are eligible to purchase shares for around $50 and play a role in the fund's investment decisions.
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