Most Americans live in survival mode barely able to keep their finances afloat until payday. The average American lives paycheck to paycheck and 40% of Americans are unable to come up with $400 to meet an emergency expense. That is because too many are dependent on their workplace income to survive. It’s hard to get ahead financially when you are dependent on one singular stream of income unless you make a tremendously high salary. Your 9-5 job will not make you rich. The key to being financially successful is to generate multiple streams of income from different streams, which pour into your life. I have been able to multiply my money by investing in assets that generate compound growth over time.
I have learned to generate money outside of that which I have to work for and produce myself. The key is to invest in assets that make money for you while you are working, sleeping, vacationing or relaxing. You can do this by investing in a rental property, business, limited partnership, stocks, bonds, or other asset. The best method that I have learned for how to multiply my money is by investing in the stock market. Investing is not a get rick quick scheme. It is a systematic disciplined strategy that seeks to generate wealth for a number of years. I have been an investor in the stock market for years and have been able to generate outstanding returns over the course of time. I want to start by explaining how I started investing and the best type of stock to invest in to multiply your money.
How I Learned To Invest
I was unfamiliar with investing growing up and did not personally know many people who had invested in the stock market. I was never exposed to financial topics in my education from kindergarten through 12thgrade. Unfortunately, the American educational system does not teach financial literacy as part of its core curriculum. I believe that financial literacy should be taught in middle and high schools so students learn creating a budget, investing in the stock market, banking at a financial institution, managing debt, and dealing with money. That is one of the reasons that I started Multiply My Money. I want to economically empower people to take control of their financial lives. Everyone is not going too be rich but everyone can be financially comfortable.
My first exposure to investing was as a 19 year old junior in college pursuing an undergraduate degree. I was a Finance major and has to take a course called Investments as part of my major. It was in the third or fourth meeting of the course that the professor explained the stock market and how investing in stocks worked. I learned the basics of stocks and mutual funds in that class. I also learned about the historical rates of returns earned on equities and how they outperformed every other asset class. It was after that class that I was hooked on investing. After that class was over, I ran back to my dorm room and started looking up different mutual funds on the Internet. I also went to the library and started looking through Morningstar, a research firm, which evaluates different mutual funds options. A subscription to Morningstar was a couple hundred dollars a month, which I couldn’t afford myself but the library provided access to Morningstar for free. I quickly identified a mutual fund that I wanted to invest in. The fund required a $1,000 investment to get started which I did not have. But the mutual fund had an Account Builder plan which allowed investments as small as $25 a month (which I could afford with my job at the time) but still required an initial investment of $250. My parents gave me the $250 to invest to get started and I was on my way!
The first fund I picked wasn’t the greatest. It had a lot of front loaded sales charges and fees but I still made money receiving a 48 percent return over the six years I held it. I dabbled in small stocks like Krispy Kreme, Blackboard, Micron Technology over those years as well. My junior and senior classes in Finance taught me fundamental analysis, portfolio selection, and asset allocation. I learned how to actually value a stock in my latter undergraduate and graduate courses. But I gained valuable experience from my early investing. Those formative years taught me a valuable lesson as to how the stock market was a great way to multiply my money.
Investing In Stocks To Multiply Your Money
While index investing is the easiest and recommended thing to do for most investors, those who wish to take more risks and multiply their money faster should dabble in buying individual stocks. (Read why you should own an index fund).The largest chunk of my personal investing portfolio is in individual stocks. It has exceeded the returns that I have earned on any mutual funds. Buying shares of stock in 8 to 10 companies in an investment portfolio offers more upside potential than buying 500 stocks in a S&P 500 index fund. The performance of one or two companies is blunted in an massive fund portfolio. You feel the impact more heavily in a smaller stock portfolio. There is much greater risk in buying individual stock but there is also much greater rewards. The investor who bought a large amount of shares in Amazon, Apple, Google, and Netflix ten years ago has achieved millionaire status today. My biggest gains in my investment portfolio have come from purchasing shares in companies like Reliance Steel, Netflix, and Costco. These stocks have become multibaggers multiplying my original investment a number of times.
What Type Of Stock Should I Buy To Multiply My Money?
You need to buy small cap and mid cap stocks. The stocks with the most potential for long term growth are small cap and mid cap stocks.
- Small cap stocks are companies who have a market cap less than 1 billion dollars.Midcap stocks are companies who have a market cap between 1 to 10 billon dollars.
- Large cap stocks are companies who have a market cap between 10 and 100 billion dollars.
- Mega cap stocks are companies who have a market cap above $100 billion dollars.
What is market cap, you ask?
Market cap is short for market capitalization, which refers to the total dollar market value of a company’s outstanding shares. The market cap is basically the value that the stock market says a company is worth based on its price and shares outstanding. Market cap is the net worth of the company. The market cap is important because it should factor into your expectations for the return you will receive from a stock. Small and mid cap stocks have greater growth potential than large and mega cap stocks. Large and mega cap stocks are safer investments tending to provide more price stability and less volatility.
While mega cap stocks are safer and provide greater stability for your portfolio, they will not deliver the same explosive growth potential as smaller companies. Companies like Apple (AAPL), Exxon (XOM), JPMorgan Chase (JPM), and Microsoft (MSFT), are mega cap stocks. Mega cap stocks are publicly traded companies that have a market cap exceeding $100 billion dollars. For example, Microsoft is currently worth $1 trillion dollars based on its market cap meaning the market has ascribed a $1 trillion dollar net worth to the company. What are the chances that Microsoft will become a $10 trillion dollar company over the next few years? That is highly unlikely, which is why I would not look to make 10 times my initial investment on a company like that. Companies like Microsoft have already made millionaires, multimillionaires, and billionaires out of early investors. They are now mature companies who will deliver solid returns, provide dividend income, and slowly grow their earnings over time. Mega cap stocks are good for creating a passive income stream in the form of dividend income but are no longer money multipliers. A money multiplier is a stock that can grow 5, 10, 20, 100 times itself.
As a person seeking to multiply your money, your job is to locate smaller companies with the explosive potential to become money multipliers while simultaneously possessing the staying power to survive economic downturns. This means companies with low debt loads who possess a sustainable business model. You can never guarantee the performance of a company but you can make smart bets on promising companies. When seeking large returns on investment, I like to invest in companies with market caps beneath 100 billion dollars. I invest in companies whose products and services that I believe in and with good management teams guiding the ship.
Small Cap Stocks
Companies like the Cheesecake Factory (CAKE), JD.com (JD), and Upwork (UPWK)are examples of small and midsized companies that are still in their infancy stages that have long term growth potential over the next decade. These are smaller brands that could evolve into bigger brands with the right management team and proper corporate governance. It is far more likely that 2 billion dollar market cap companies like Cheesecake Factory and JD.com reach a 10 billion dollar market cap before a behemoth like Apple sees its 1 trillion dollar market cap rise to 5 trillion dollars. I am not advising you to avoid Apple stock or to go buy shares in the three aforementioned companies. I am just telling you to moderate your return expectations based on the size of the company.
While small caps offer great potential, remember they are far risker than mega cap companies. Small cap stocks are subject to huge price swings in their shares making them more volatile than mega cap stocks. Share prices can rise rapidly and crash quickly. You have to be willing to ride out the highs and lows of small cap investing. Smaller companies have fewer assets, lower cash flow, lower earnings, and less access to capital than larger companies. Small cap stocks face the challenge of competing against larger corporations and proving to investors and lenders that their business models are sustainable over time.
I believe that small and mid cap stocks must be an essential part of your portfolio for the investor seeking to multiply their money. Risk takers can allocate 30 to 40 percent of their portfolio to small and mid cap stocks while the risk averse should allocate 10 percent to these assets. Selecting a small basket of smaller companies can inject life in a conservative portfolio and add super sized gains to your bottom line.