The S&P 500 reached a record close yesterday: Tips for Investing in the Stock Market

A brief recap: In March, we saw the stock price of major stock market indices like the S&P 500 fall over 30% from around $3,100 to around $2,200 wiping out 3 years worth of profits in a month! Due to the coronavirus pandemic, the shutdown that occurred as a result leading to high unemployment and reduced international trade. This led companies to reduce their stock market targets with some companies even predicting that the S&P 500 would fall to as low as $1,700. In response, the Federal Reserve lowered interest rates to 0%; the US Congress passed a $2 trillion stimulus package giving money to individuals and companies and in April we began to see some recovery in the stock market.

What happened and why were so many people wrong about where the stock market would be today, or are they right?

We know the S&P 500 is a fund that owns shares in the top 500 publicly traded companies in the US, but how is the stock price calculated? Is it a simple average of the share prices of all the 500 companies? Well, no.

The index uses a weighted average of the companies within the index by each company's market value. This means that the more valuable a company is, the more influence the company has on the S&P 500 stock price. Currently, 5 companies of the 500 make up 20% of the value of the S&P 500. Those companies are the tech giants Apple, Microsoft, Amazon, Facebook and Google or the common acronym coined for them "FAAMG".

If you look at the stock performance of the S&P 500 year on year, you will find that over half of the companies listed are actually down from where they were last year. If this is true, why is the index still moving upwards?

This is because the companies that have higher weights are simply doing well enough to cover the losses and even cause the index to move higher. Tech giants like Amazon, Apple that have been doing excellently well over the last few weeks and other stocks doing well enough to cover for the ones not doing well have essentially been carrying the index to new highs.

The underlying reasons for this could be that the shutdown is leading more people to use more Tech services, causing them to see high profits. Also, since the Fed has reduced interest rates to 0%, savings and other low-risk investment pay very little leaving investors who want to make a return on their money to turn to either precious metals like gold, real estate or the stock market. Some people even posit that coronavirus numbers have started having less effect on the market as people have gotten more accustomed to it and are less phased by the news surrounding it. With no major negative news coming from the 'US-China trade war' quarters and no major negative coronavirus update, there has been very little reasons for companies' share price to fall.

What do you need to know

With the advent of stock trading apps like Robinhood and EToro for US and UK users respectively, Bamboo and Chaka stocks for Nigerian users and several others that have made buying and selling stocks and options for private investors, it has become imperative that investors looking to invest in stocks learn the tips to make the best out of their investments.

When we hear about huge intraday movements like Kodak stock did on Wednesday, July 29th when the share price moved from $7.94 to $38.94 before it closed at $33.20 and other large 24-hour increases, it's normal to get intrigued by the stock market and want to try your hand at it. With the right bet, we can "cash-out" and make some big wins. As reality has shown us time and again when such massive pumps happen as it did with a US company called Hertz, reality usually sets in quickly and brings the prices back down to earth, so this might not be the best strategy.

Here's what you can do instead to possibly make more money in the long term.

1. Before investing in a company, understand how that company works. How profitable is the company? Do some research to know more about the company. The technical aspect of how to pick shares is quite a lot. You can start with the companies that you know and are likely to grow in the future, like Amazon, Apple, Facebook. Stock trading apps like Bamboo also gives a "choice of the month" company so you can invest in that as well.

If you are not sure of what to start with or you don't really understand how to start, buy index funds. There are less risky stocks like the S&P 500 Vanguard ETF etc. Index Funds are a collection of different shares in the market. So instead of going to buy the shares of those 500 companies, you could just buy 1 share of the S&P 500. The advantage here is that if 1 of those companies go bankrupt, the S&P 500 would still be in operation so you can be sure that your money would never be lost.

Do not be scared when you see share prices of like $1,000 or $24,000. You can invest as low as $10 on some retail stock trading apps. You do not need to buy 1 full unit of a share; you can buy a fraction of a share.

2. Long term is always best. Buy and hold. Don't try to time the market. More often than not, you would be wrong. Research has shown that time in the market beats timing the market. A better strategy would be to invest a certain amount consistently, and when prices go down as they did at the start of the lockdown, don't panic sell. In the words of the billionaire investor, Warren Buffett, "the stock market is a device for transferring money from the impatient to the patient". Be patient.

Think of shares like buying clothes. If the price of clothes go down, would that be a good time to sell all the clothes you have out of fear? Of course not. If you have money, that would be the best time to take advantage of the situation and buy cheaper clothes that would later rise back to their normal value and then you can sell. When you see share prices fall, think of it as Black Friday. If you have the money, you can buy all the shares you've always wanted to buy at discounted prices.

3. Use free sites like wallmine.com to track how the share is doing and get more detailed information like the pre-market and after-market prices. On Bamboo, for example, you can only get the prices when the US stock market is open. Which is from 2:30 pm to 9 pm Nigerian time. Wallmine allows you to see the prices that stock traders are buying and selling at after the stock market closes (after-market prices) and before the market opens (pre-market prices)

4. Don't invest any amount you are not comfortable losing. If you are comfortable with losing the money, you would be less likely to make rash decisions that might be unwise when you see your share price drop massively

Final Thoughts

It seems the best "most secure" bets anyone can make on individual now would be in FAAMG companies. With the huge market shares they control in their market spaces and their massive potential for growth given the acquisitions they are currently making, they are making moves to become even richer companies in the coming years. With Apple's stock split coming, the shares for the company are going to be even cheaper for retail investors to acquire.

With the "monopolies"/"oligopolies" these companies control, where if they see a budding competitor, they either buy them out or replicate their features, they are almost guaranteed a large market share in coming years. These companies are not slowing down anytime soon; they are not resting on their oars either. The only major threat to their ability to do this is if they are significantly regulated in countries or by international organizations. As shown in Congress' meetings with CEOs like Zuckerberg, even Congress might have little powers in keeping them in check. With their large lobby groups that they pay heavily to work Capitol hill, they might just be able to get away with running their monopolies.

If you cannot beat them, as an investor, you can at least benefit from them.

While it is unlikely that these companies would 10x, i.e. grow to have over 10 times their value today soon, they are "safe" bets that can still give above normal return for your money.