Over the last few weeks there has been a great deal of buzz about GameStop. In case you missed it, GameStop is a retail company that sells video games and associated equipment in shopping centers across the country. Due to the recent pandemic, many Wall Street Investors noticed that people are shopping in person less and thus predicted that the GameStop and its stock would go down in price. Some of those investors even made bets that this would happen (by “shorting" the stock).
Many individual investors on an internet forum disagreed with this prediction. In an act of defiance, they decided to buy large shares of GameStop stock and encouraged everyone on the forum to do the same thing. As more and more people bought the stock, the price of the stock increased drastically. The stock price increased from around $20 at the start of the year to over $400 at one point proving the Wall Street investors wrong and causing some of the largest investment firms to lose millions of dollars in the process. Conversely, many of these individual investors who were on the internet forum made thousands of dollars. Many people realized how much money they had made and began to sell the stock to realize their profits. As more people sold their stock, the price of the stock began to decrease. As I’m writing this article, the stock is around $60.
Here are 5 lessons we can learn from GameStop:
1. Sometimes buying individual stocks can make you a lot of money. The GameStop stock price increased from $20 to over $400 at some point. People who purchased shares of the stock around that lower number and sold it around the higher number made a substantial profit. There have been reports of people making thousands of dollars and beyond.
2. If you purchase a stock when it is already near its peak you can lose a lot of money. While many people on the internet forum who bought the stock when it was around $20 made a huge profit, many people who purchased the stock when it was near $300 or $400 were not as fortunate. Because the stock went down in price and is now around $60, anyone who bought the stock higher than this price lost a substantial amount of money.
3. Making money buying individual stocks relies on good timing and good luck. Some people made a lot of money by purchasing the stock and some people lost a lot of money by purchasing the stock. Which group you may fall into if you choose to buy individual stocks depends on many factors, but two of the biggest factors “good timing” and “good luck.” None of us can predict the future, so despite how good we think our guesses may be, making money by purchasing individual stocks has a great deal of risk. Who could have predicted that people on an internet forum would buy stock in a struggling company and cause the price to increase over 600%? Who could have predicted that the price would decrease to $60 less than 2 weeks later? A lot of the profit people make buying individual stocks requires them to buy the stock and sell the stock and just the right point and timing these two things can be challenging to say the least.
4. The prices of stocks can change drastically. In this situation, the price of GameStop stock ranged from $20 to well over $400 and the change happened in the span of weeks. Although changes to stock prices don’t usually have this wide of a range, this situation was a good illustration of a key investment principle: prices of stocks can change and some stocks are more volatile, and likely to have these types of changes more frequently than others. This can be great news for investors who are able to “time the market” and happen to buy the stock at its low point, but this can be hard to do. Stock prices change for myriad of reasons that you can’t always predict.
5. Stock prices aren’t always based on the company’s financials and overall value. GameStop prices changed a lot over the past few weeks, but this change wasn’t based on something that the company itself did. In fact, nothing about the actual business of GameStop or its financial outlook changed. Yet, despite this, the stock price fluctuated a lot. Although this worked out well for investors in GameStop who made profits, the fact that stock prices can change may not be so good for other companies who are more successful. In fact, it isn’t uncommon for successful companies to experience a drop in their stock price despite increasing their revenue and doing good from a “business sense.” Since a company’s stock price isn’t always based on the company’s financials, this makes it more difficult to predict which stocks will earn you a profit and which will not.
My point? Buying individual stocks is risky. You have the potential to make a lot of money, but you also have the potential to lose a lot of money. What actually happens for you depends a lot on luck. To avoid having to rely on good luck, I invest in index funds. This means I own a little piece of all the stocks. This strategy gives me steady profits and also minimizes risk.
5 Things To Do Financially In The Month of July:
July 1st is a big day in the medical world. It’s when graduating medical students start their first day as doctors, and experienced resident physicians get “promoted” with more responsibilities and a pay raise to match. Whether you’re in the medical field or not, the start of July marks the halfway point of the year and can be a great time to re-evaluate your finances and make any necessary changes. Here are 5 things we should all be sure to do in July:
1. Create a spending plan. For the interns who are now getting paid, the residents physicians experiencing a salary increase, or the attending docs that have more money than they ever have before, now is the time to create a spending plan. Going from barely having any money to a steady [large] paycheck can be exciting. However, if you don’t manage your money wisely, you may find that your money is gone sooner than you think or realize that you wasted it on things you didn’t need. Having a spending plan can help prevent this from happening. It’s having a basic outline of the things you need to purchase and reserving money for other things that may be important to you, without going overboard. It’s determining which bills and other costs you need to cover each month (rent, electricity, internet, car insurance, etc) and thinking about how much money you also need to set aside for other things like groceries, gas, personal grooming, etc. The goal is to figure out the max amount you can afford to spend on certain items each month so that you never have an issue paying your bills and have also managed to save money for other priorities and still have some money left over to enjoy.
2. Make sure you have insurance. You can try your best to plan for certain life events and expenses, but you can’t predict everything. For large expenses that we can’t predict, we need to have insurance in place to cover those costs. Although signing up for insurance may not be the most exciting task to complete, it’s absolutely essential. We all need some form of medical insurance to cover basic health expenses, prescription costs, and any hospital bills. We also need long term disability insurance so that we have income security in case we get diagnosed with an illness or get an accident that precludes us from working at our full capacity. Lastly, those with families or other people who rely on their income also need term-life insurance so that their families have a means of financial support if they happen to die before they have become financially independent.
3. Get a handle on your student loans. Many people have student loans. Physicians who are in residency or young professionals who work for non-profit hospitals and public institutions may qualify for public service loan forgiveness (PSLF) or some other type of student loan forgiveness plan. In order to sign up for this program or ensure that your payments over the last 12 months were properly counted, it is essential that you complete the employer certification form each year. Anyone with federal student loans may also want to consider signing up for an income driven repayment plan like PAYE or REPAYE so that your monthly payments are based on your income instead of a much higher amount that you may not be able to afford. Those who are already enrolled in an income driven repayment plan must complete the mandatory annual recertification to remain in the same plan each year. Once you determine a repayment plan and re-certify any forms, it may also make sense to have your monthly payments automatically withdrawn from your bank account. Many loan servicers will even lower your interest rate if you sign up for these automatic payments.
4. Pay down your debt. For those who want to build wealth and become less reliant on each paycheck, it’s imperative that you prioritize paying off your debt. Many people accumulated credit card debt in their early twenties or have used credit cards to cover moving expenses, furniture costs, or previous vacations. Other people may have taken out car loans or borrowed money from other sources to make ends meet. Although it may not be feasible to pay all of our debt off instantly, it’s important to come up with a feasible payment schedule to get rid of the debt sooner rather than later. Simply paying the minimum amount each month will cause us to pay a lot of extra money in interest and may really impede our ability to build wealth and financial security. Making a goal of having at least one of our credit cards or loans completely paid off within the next 12 months might be a decent place to start.
5. Start investing. Part of adulting means setting aside money for retirement, creating a savings account and investing money in a way that helps build your net worth. Many people have elaborate investment plans or try to play the exhausting game of picking individual stocks to purchase. While that may work for them, investing doesn’t have to be complicated. You can start by funding your employer-sponsored retirement account and a Roth IRA (or backdoor Roth IRA). Simply choose a percentage of your income you want to contribute towards retirement (ideally, you’d want to start off around 10%) and choose to invest the money in various index funds or a target retirement fund that invests your money in thousands of different stocks and bonds. When I started residency, I prioritized paying off debt and only contributed about 5% to retirement. Once I paid off the debt, I drastically increased that percentage and started fully funding my emergency fund and other savings.
My point? If you want to ensure you’re on the road to financial stability and independence, start by completing the 5 steps above.