Put your money where your mind is

When the late Robin Williams announced to his father that he intended to become an actor, he was told he must learn a trade to fall back on in case his passion was not enough to get him to hit the big time.

For Mr Williams, welding was that trade and he never had to use it.

For today’s younger generation, however, their knowledge and passion could provide them with a great nest egg as they grind out a day in an office.

Investing in the stock market, while generally considered to be inherent with risk, is also a great way to accumulate wealth. The secret is having a deep understanding of the industry and companies you invest in.

Let’s take the example of a tech graduate who has spent years learning about computers, electronics, gaming and app design. This person always has the latest gadget and is the first port of call for friends with an IT problem.

Just seven years ago, Facebook launched an initial public offering and listed on the stock market with 421,233,615 shares at a price of $38 (£29.33) each.

If our tech graduate, with a good understanding of how social media sites make money, had bought just one share then, it would now be worth a staggering $166.38 (£128.42), as at 8 February 2019 – a rise of more than 330%.

Your capital is at risk.

Of course caution is needed, and young investors should be careful not to confuse interest with understanding.

For example, owning an iPhone doesn’t mean you have a full understanding of the inner-workings of a tech-giant, just as wearing the latest designer clothes doesn’t make you a guru on fashion houses.

Legendary investor Warren Buffett often refers to his ‘circle of competences’ when speaking publicly about his philosophy. He has long believed in only investing based on the knowledge you have, but supports this with years of research and understanding of certain businesses.

One of his most famous quotes reads: “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”

This logic also applies to the valuations of individual companies, or the share price. It is important to question whether a company is under or over-valued and what external drivers could push or hinder future growth.

Consider the past performance of a stock. Although it can’t be relied on going forwards, it will provide insight into how that company will behave in certain market conditions.

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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