According to W.P. Carey School of Business professor Debra Radway, investing early on is a good choice when saving for the future, even for students.
Although the economic impacts of COVID-19 have left some feeling uncertain, Radway said she's seen many students trading with apps like Robinhood, an app that lets its users invest in and trade stocks without paying commissions or fees.
Radway said investing is a smart choice for students, but many don't know the difference between investing and trading, and some aren't equipped to make decisions on stocks.
Responses have been edited for length and clarity.
Q: What has changed about investing throughout the pandemic generally?
A: I think what I'm seeing right now in the overall stock market is that people are not really investing. The young people especially, they're trading. They're thinking, "If I buy the stock it's going to move up a lot, and I'm going to make a lot of money in a short period of time."
I've had a few students ask me about stocks and the stocks that they're asking me about have gone up a lot in price. They're not necessarily going up because of the fundamentals, they're just going up because of supply and demand imbalance.
It's not that people are looking at the back and saying, "Boy, this stock has a great future and it's priced really reasonably and therefore I'm going to invest in it." They are buying the stock just because it's going up.
Some people move in and out of a position very quickly because they're trying to capitalize on a movement upward, and that's really trading.
Q: Why might so many people be trading right now?
A: After we went through this pandemic, the Federal Reserve threw a lot of cash into our economy so that it didn't crash. What happened when they threw a lot of cash into the economy, the cash had to find a home.
It started going into buying things, and so the stock market went up and real estate has gone up because of all this cash coming in from the Federal Reserve.
So we've had this period where things have been going up, not necessarily because the stocks are worth more or the companies are worth necessarily what they're trading at, it's just a supply and demand.
I think students during this time had extra time on their hands — a lot of people had extra time on their hands, they were at home. So they started taking up buying and trading stocks as a hobby because they have the time.
Q: Do you think younger students should be trading over investing?
A: I doubt many students have the skills at age 20, or the experience, to successfully trade.
When the markets going up, everybody that trades thinks they're a genius and they're good at it. The second the market goes down, they're going to realize the only reason they were making money is because there was this quick outburst in the market, because the Federal Reserve is putting a lot of money into the system.
Q: How should students balance saving and investing on a limited budget?
A: When you're in an uncertain environment, the best thing you can do is build some cash reserves so that you know if you lose your job or something else happens, you've got something to fall back on.
I would definitely focus right now on a cash reserve, because we're just in an uncertain economy.
Q: Do you have any advice for students who don't know where to start?
A: The best strategies for students and young people is to invest consistently over time. Put money away in an IRA (individual retirement account) or in an investment account and every month, invest in a mutual fund or an index fund.
What happens when you do that is, the stock market can go up, the stock market can go down, but over time you continue to buy in at different levels called dollar cost averaging. Thirty to 40 years from now, based on historical numbers, that money should have grown substantially.
Q: How should new investors get educated about investing?
A: There are some really good sources if you go on to the website of companies like Fidelity, Vanguard, Charles Schwab, they'll often have information on their recommended approach to investing. I think educating yourself on understanding the basic terms of investing and different types of investments is really important.
Reach the reporter at gmlieber@asu.edu and follow @G_Mira_ on Twitter.
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