Stock Market Simulator
No form of investment is risk-free. Even if you choose not to invest in the stock market, cash is subject to loss of value due to inflation. Since it's not possible to avoid any type of risk, a more successful strategy is to understand the risks associated with different types of investments and work on a plan which fits your timelines and risk tolerance.
This tool was designed to let you explore the effect of different risk levels and how they affect your investments over the short and long term.
What is the Stock Market?
When people say stock market, also known as equity market, they typically refer to the collection of markets and exchanges where one can purchase stocks.
For the purpose of this lesson, stocks can be simply thought of as partial ownership of a company. This is why they are also known as shares — because a group of investors share the ownership of the company. When you own shares worth 1% of a company, you are entitled to 1% of the money the company earns after all the expenses are paid — these are called dividends.
Similarly, when the company grows in value, the value of your shares grows proportionally. If you own 1% of a company when it's worth $1 million, your investment is worth $10,000. If the company grows and its total value becomes $10 million, then the fraction of the company that you own is worth $100,000.
Positive and Negative Returns
A company's dividends given to shareholders can never be negative; they can however be zero, and this is the case with many of the companies in the stock market. That doesn't necessarily mean that a company is strictly unprofitable, it could mean that a company chooses to reinvest all of its profits into its continued growth.
On the other hand, how much a company is worth can decrease in value. Even though a company can never be worth a negative value, your investment returns can have negative growth. For example, if you own shares of a company and its value decreased by half, then half of the money you invested in that company will be lost. In the worst case scenario, a company can go bankrupt and your shares of that company will be worthless.
Stock Market Volatility
Because of the potential negative returns, your investments in the stock market can in fact decrease in value. The ups and downs in the stock market are known as market volatility. This scares many risk-averse people, who prefer to keep their savings out of the stock market altogether. We at FinMango strongly encourage everyone instead to learn about the risks and deploy a strategy that serves your long-term goals.
Picking an individual company is more risky than investing in several of them, since any one company can fail; but the more companies you invest in the less likely it is that they will all fail. An extreme example of this are index funds.
Evaluating and Mitigating Risk
Index funds are a financial instrument which allow you to invest in a large number of companies, minimizing the risk of all of them going bankrupt virtually to zero. They are widely considered the safest way to invest in the stock market, with a proven track record going back many decades.
While the stock market as a whole has had periods of negative growth, which in economic terms are known as recessions, historically it has always recovered and surpassed its previous historically high values. This essentially means that, if you are a patient investor, there has never been a bad time in history to invest in the stock market.
Simulating Stock Market Returns
To illustrate all the concepts you just learned about shares, the stock market, index funds and volatility, we built this tool to simulate different scenarios using probabilities. Let's see what happens!