Who would have thought that a bricks-and-mortar video games retailer would kick Coronavirus off the front page? Don’t worry if you have no idea what we’re talking about – let’s back up a bit and start with a topline explanation of what’s been going on recently.
A bit of background: Reddit and GameStop
Over the last few months and specifically the last fortnight, an army of private investors spotted – through social media (mostly Reddit) – that a number of hedge funds were trying to make money by betting that the share prices of some old name stocks (GameStop, Nokia and Blackberry among them) will fall. This is a financial mechanism known as ‘shorting’.
However, driven by both the desire to make money and teach institutional investors a lesson, fearless amateur traders used people power to buy these same stocks (in massive numbers). This pushed the stock price sky high (to the moon was the battle cry).
By last week’s end, battered and bruised Melvin Capital (the hedge fund that put the first match to the tinderbox) saw their assets fall $4.5bn (since 1 Jan 2021).
Robinhood and other ‘new’ trading and investing apps had seemingly betrayed their users by limiting trading and were facing a revolt in the form of a class action suit against them at the SEC. Not to mention 1* app reviews – a death knell in app stores.
As for the amateur investors, spurred on by the likes of Elon Musk and high profile lawmakers (both democrats and republicans), they had both made (and lost) fortunes.That’s what’s been happening and its history in the making. Read our full take on the Gamestop story here.
Back to investing basics
Now maybe you’re wondering what that has to do with us? Well, it presents the perfect opportunity to go back to the foundational elements of investing – something we are regularly asked about by both students and staff.
It seems everyone wants to understand the stock market better with the view to investing in it. So over the next few weeks, we are going to break it down in this ‘investing 101’ blog series.
Even in these uncertain times, a move towards considering investing is a positive step – and there are two main reasons this is true for people who want to grow their wealth.
2 reasons to consider investing
Interest rates are crazy low – and are likely to remain so
On July 5th 2007, the Bank of England raised interest rates to 5.75%, citing inflation concerns. That is the last time we saw a hike. Interest rates have only come down since then, settling at 0.1% in April 2020.
This means that today, every £1,000 saved will generate £1 in interest. £1 a year.
The stock market (specifically the FTSE: the main UK exchange) has, on an annualised basis*, had an annual total return of 7.8% over the last 35 year period. So the stock market is (on average and ignoring tax and risk obviously) returning 78x more than saving alone. (*To calculate this we take the total return for the FTSE 100 over 35 years and annualise.)
Today’s low interest rates not only mean your money isn’t growing, but it may even be shrinking – all because of inflation.
Think of it like this: if interest rates are 0.1% and inflation is 0.8% (currently true), your money is growing at 0.1% (so your £1,000 becomes £1,001) but your buying power is dropping by 0.8% (your £1,000 will in a year’s time buy £925 of stuff).
Opportunities to grow your money
There are two types of stocks:
Dividend paying stocks:
Dividend-paying stocks can supercharge your investments because each year (or 6 months), they will pay out a portion of the company’s earnings, which you can take as cash or as additional shares.
E.g. a company will return 5% twice a year in dividends – let’s say the price is £1 per share and you have 1,000 shares. In that case, the dividend you are owed is 5p x 1000 shares = £50. You could either get this in case or you could get 50 new shares.
Growth stocks:
A dividend is a percentage of a business’s profits that is paid back to shareholders.
Not all companies pay out dividends. Fast growing companies – like technology players – often prefer to reinvest any profits into research, development and innovation with the objective of growing the business.
The next step
Investing is a huge, and critical topic, and it is one of the subjects your students (and colleagues!) ask us about most.
In the coming weeks, we are going to dig deeper (and wider) into the subject. After all, if knowledge is power then surely financial knowledge is financial power!
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