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How to Invest as a College Student
Everyone wants more money, but most college students are strapped for cash. At the very least, we don't have extra money to risk in investments, right? Wrong! College is the best time to start in the world of investing. Your mind is already used to searching for information, and you don't even need to "invest" that much time if you don't want to. And you can put in whatever amount of money you want.
Of course, you can always jump right into day-trading on the stock market, but if you don't know much, there is a steep learning curve there.
Instead, I'm going to let you in on a "secret" (it's not really a secret in the sense that no one knows about it; more like it's a secret because many people don't realize how great it is). It's not a scheme, and I'll get nothing out of telling you to do this. This strategy is called Dividend Reinvestment Programs, or DRIPs.
What is a DRIP?
Unlike regular stocks, which you buy on the stock market at "market value," you buy DRIPs directly from the company, usually at a slightly discounted price. What's special about them is they're not just worth what you paid for them; they are also worth the dividend return that the company offers.
So, let's say you bought fifty shares of Company A for $9 a piece and held onto them for one years. That's $450 you put in, and the company will give you back a percentage of that quarterly, regardless of what the stock is doing (up, down, whatever). That percentage is sometimes something like 4% (and sometimes much higher). And the reason it's a reinvestment program is that they use that 4% each quarter to buy more of the same stock, so it compounds over time.
Let's say the stock stays at $9 all year (unrealistic, but I want to take that variable out of the picture). Four times a year, the company gives you 4% of what you invested and uses it to buy more of their shares.
- January: $450
- March: $450 x 1.04 = $468
- June: $468 x 1.04 = $486.72
- September: $486.72 x 1.04 = $506.19
- December: $506.19 x 1.04 = $525.43
So you've made $75 without doing anything!
Is That All?
No! That’s only the beginning; it gets so much better. Remember how we assumed the stock would stay at $9? Well, you’re not going to buy a stock that stays at the price you bought it; you’re going to buy a stock that grows! Let’s say that, in a year, the stock goes from $9 to $12. That $525 was assuming it was at $9, but at $12 it becomes $700!
But I Don't Have $450 to Start!
Well, I’ve been leaving something out until now. See, because it’s a reinvestment program, they want you to constantly be putting in money. This enhances the compounding effect for you, and it gives them more money to put into their cash flow.But you don’t have to put in $450 each time or anything. Let’s say, instead, you set aside $25 a month. I bet you can probably do that, even if you have to skip a coffee once a week or something. So you start out giving them just $25 to buy the discounted shares, and then the program takes $25 out of your checking account every month to buy more shares at whatever price they are then.Before you know it, you have $450 worth of shares because of the dividends they’re paying and the $25 you’re putting in every month!
That’s pretty much it. You can set up that program with a company or two ($12/month to one and $13/month to the other, if you like), and pretty much forget about it. You keep an eye on the stock, of course, but a slight dip or two shouldn’t have you worrying at all. You’re in this for the long-haul.The next step, now that you know about this, is to research a company. That’s sort of the tough part if you don’t know what to look for. The easiest way to start is to think about where the world will be in twenty years when you need this money (think of the sum by then!!)… What company that exists now will still be doing well? Wireless companies? Computer companies? Energy companies? Do you like the way your cell phone provider works or the way your laptop manufacturer markets its products? That’s a great launching point for some further research.See how their stock is doing (just look at the chart and see if it’s generally going up or down), and make sure that they offer dividends. See what plans they have for the future (are they betting all their money on the idea that oil on this planet is unlimited? red flag!), including products they plan to release and general company attitude. Think China will be big in ten years? Invest in a company that thinks that, too.When choosing stocks, be careful not to “put all your eggs in one basket”. If you’re going to invest in two DRIP companies, for example, don’t invest in two companies in real estate because the real estate market could go to hell (and it has, incidentally). Invest in one energy company and one real estate company, and that gives you a bit better spread. Even better if you can invest in three and throw in a pharmaceutical company or something.
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How Risky Is This?
Since you’re investing over a long period of time, you want to invest in low-risk companies (not a company that’s just starting out, for example) that are well-run and will be around in ten or twenty years.
And because the company is returning 3-16% in dividends, you will only lose money if that company’s stock drops more than that percentage in the ten years you own the stock.
Also, because it’s a long-term investment, the taxes are not income taxes and will be less of a percentage than if you were doing day-trading.
But the economy can be highly unpredictable, so you never want all of your money in one place. Use DRIPs as an entry point for learning more about the stock market. If you like it, you can do some day-trading, too. If not, you can still invest in DRIPs and then invest the rest of your money in other ways (real estate, for example).
To build wealth over the long-term (and to still always have access to it, unlike with a 401k), DRIPs are an excellent way for college students to invest their money.