The S&P 500, a stock index that consists of 500 of the largest publicly traded companies in the U.S., has historically generated average annual returns of roughly 9% to 10%. As a result, there is no better way for people to passively grow their wealth than to invest in the stock market. Over many decades, even a relatively small sum of money, which can give you exposure to some of the best companies in the world, can turn into a life-changing amount.
If you're ready to invest $1,000 in the stock market, then continue reading to learn how to get started.
Keep these principles in mind
Just like any new endeavor, it's worthwhile to focus on and really understand the basics before doing anything else. The stock market can be intimidating at first, but there are some foundational rules investors should follow to maximize their chances of success while at the same time minimizing the odds of losing their savings.
First, only invest money that you don't need for at least the next five years. This is extremely important to remember because the stock market is volatile. Since 1946, drawdowns of 5% to 10% have occurred 84 times. If you need the money for an unexpected expense, you might be selling your holdings at the worst possible time. Taking care of any high-interest debt and having an emergency fund allow investors to have a long-term mindset, which is crucial for achieving great returns.
Next, regularly add savings to your portfolio. Not only does this build a consistent habit of putting money aside for the long term, but investors also benefit from dollar-cost averaging. This simply means that investors buy into their various positions at different prices over an extended period of time, avoiding the allure of trying to time the market.
And perhaps the most important piece of information new investors must follow is to hold through the stock market's ups and downs. Again, having a long time horizon helps here. Furthermore, owning a diversified portfolio of at least 25 stocks is a good idea as it limits the risk that any one position decimates your savings. It also allows for a smoother ride along the way, which is absolutely vital for investors to stick to their investment strategies.
A great starter stock
Now that we have some critical basics of investing out of the way, let's turn our discussion to a stock that beginner investors might want to seriously consider. It's an easy-to-understand business with a strong brand, a long and successful operating history, an industry-leading position, and still ample growth opportunities ahead. I'm talking about sports apparel juggernaut Nike (NKE -0.42%).
From 2011 through 2021, Nike more than doubled annual revenue while more than tripling its yearly diluted earnings per share. The business is a leader in high-quality, premium athletic sneakers and clothing with trailing-12-month sales of $46.3 billion. Selling merchandise through a global footprint of company-owned stores and third-party retailers, as well as Nike's budding digital presence that has more than 79 million members, creates a deeper connection with consumers.
The company's powerful brand is a key competitive advantage. Nike is a marketing genius, partnering with superstar athletes to gain broad visibility and to sell an image centered on winning. Spending on marketing -- called "demand creation expense" -- increased 40% year over year to $1 billion in the latest fiscal quarter (ended Nov. 30, 2021). And the recent acquisition of RTFKT, a creator of virtual sneakers, signals Nike's ambitions to be an innovator in the digital world.
Looking ahead, Nike sees a huge growth opportunity in China. Although the country is still experiencing pandemic disruptions, it represented 16.2% of overall revenue in the fiscal 2022 second quarter, a figure that has quickly risen over time. And continuing to leverage the women's and Jordan segments will further propel growth in the years ahead.
Nike's stock price has fallen 18% from its all-time high in early November, providing investors with a chance to buy shares (which have soared 158% over the past five years) at a relative discount. I think this is a low-risk investment, albeit one that still has the potential for solid returns, for those who are just getting started.
Investing doesn't have to be intimidating. With some basic, foundational knowledge and even a small amount of money, I believe that anyone can position themselves to build lasting wealth in the stock market.