There are 3 things to understand about investing if you want to make money in the stock market
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Learning how to invest in stocks is easier than it seems.
Investing is anyone's game. And putting money in the stock market while you're young is one of the best - and easiest - ways you can set yourself up for a comfortable retirement.
But the reality is many people, especially younger Americans, don't invest. Millennials are the only generation to favor cash over investing in the stock market, according to a Bankrate survey.After all, investing your savings in the stock market, rather than keeping all of it in cash, could amount to a difference of up to $3.3 million over 40 years.
How much could your investments grow by the time you retire? Find out with this calculator from our partners:Luckily, investing isn't as complicated as it seems. According to ESI Money, there are three factors that determine how well your investments will perform:
In other words, it's all about maximizing the benefit of compound interest.
Take a look at the chart below, which illustrates the difference in savings for a 15-year-old who puts $1,000 of their summer job earnings into a Roth IRA - a retirement account where your savings grow tax-free - for four years and then stops, and a 25-year-old who puts away $1,000 until age 28 and stops.
Assuming a 7% annual rate of return, the early saver will have nearly twice as much money saved by age 65 as the late saver, with no extra effort whatsoever. Even if the late saver continued putting away that same amount until age 30, they'd still come up short.Andy Kiersz/Business Insider
The best way to maximize earnings is to keep saving and investing consistently, but the idea remains: The more time your money has to grow, the more you'll likely end up with.
The NerdWallet analysis also found that investors had a 95% chance of earning nearly three times their initial investment, while traditional savers had less than a 3% chance of tripling their investment.
Still, the rate at which your money grows is completely out of your control. That's the nature of the stock market - not even legendary investor Warren Buffett can guarantee big returns.Ultimately, you're doing well if your investment outpaces inflation, which won't happen if your money is shored up in a bank account with low interest rates. To minimize risk, diversifying your investments across different types of companies, industries, and countries is key.
You can start by investing in a low-cost index fund that does the diversification for you, like the Vanguard Total Stock Market Index Fund. Another increasingly popular tool for novice investors are robo-advisors, which use an algorithm to build and manage your portfolio for a low annual fee. Just make sure you're not paying annual fees higher than 0.5% on any "low-cost" investment account or it'll eat into your returns. Wealthfront and Betterment can be good fits for people who want to start investing with small portfolios and "set it and forget it."ESI Money sums up the winning formula best: "Save early, save often, and save more as time goes by."
Want more investment options? Our partners Ally Invest and Wealthsimple can help you get started.
Personal Finance Insider offers tools and calculators to help you make smart decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money is up to you. If you take action based on one of the recommendations listed in the calculator, we get a small share of the revenue from our commerce partners.Copyright © 2021. Times Internet Limited. All rights reserved.For reprint rights. Times Syndication Service.
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