Q: I'm wondering: What is the fastest way I can invest to make a lot of money as a 21-year old?
A: This is a difficult question to answer because anyone who knew a sure way of getting rich quickly would be too busy doing it to share the advice with others. That's just a reminder to be wary of get-rich-quick schemes.
While young people are often natural risk-takers, the wise investment move is to use your youth as an advantage by taking the long view of your investment program. After all, successful wealth-building is a marathon, not a sprint.
Investing or gambling?
It is important to distinguish between investing and gambling. The distinction may not be as clear-cut as it seems. Gambling does not necessarily involve a trip to Vegas or betting on a fantasy football website. It can be done with stocks and bonds and other securities that have all the appearance of being investments. The difference is how you use those securities.
Investing is based on a fundamental analysis of which securities may have more value in the long run than their current price. Gambling, or speculation, is simply buying a security whose price you think could go up regardless of whether the underlying entity is actually worth it.
Because people tend to speculate in more volatile securities, it can be a faster path to making money. Like gambling, though, it can also be a quick way to lose money. It is certainly far more dependent on luck and guesswork than fundamental investing.
Dialing up investment risk
If you've decided to get serious about money, congratulations! Besides the distinction between speculation and fundamental investing, there are other ways to dial up investment risk if that is what you are looking to do:
Normally, investors diversify across several investments to dilute their risk. Concentrating in just a few securities is one way to dial up both risk and potential return.
- Margin investing
This means making investments with borrowed money. It amplifies returns, but that goes for both positive and negative returns. Also, you have to pay interest on the borrowed money, meaning your investments have to do fairly well just for you to break even.
Puts and calls effectively allow you to amplify your returns by investing based solely on change in price rather than actually owning the underlying security. The risk is that, if the price doesn't change the way you called it within a limited amount of time, you lose your entire investment.
- Selling short
This means betting that a stock will go down rather than up. It's considered to have a disproportionate risk because the best you can do is the difference between the stock's current price and $0. If you are wrong and the stock goes up, there is theoretically no limit to how high it could go -- and the higher it goes, the more you owe.
Using these techniques -- and being able to assess when taking higher risk is worth it -- can be challenging even for seasoned investors. Starting out, it's better to gain some experience with lower-risk investing and then gradually get more daring as you become familiar with the financial markets.
Picking the right online broker for your needs
Once you decide how to invest, look for the best online broker well-suited to your approach.
If you are starting out with a relatively small amount of money, look for an online broker with a low minimum account size, low commission rate, and no monthly maintenance or inactivity fee. If you plan on using margin, look for a broker with a low margin interest rate for the amount you intend to borrow. If you intend to do fundamental research, look for a broker with a robust suite of research tools and sources for you to use.
Getting rich quickly is easier said than done. In the end, you may find it's more rewarding to become a knowledgeable fundamental investor.