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Financial Freedom & Building Generational Wealth; Learning How to Invest in the Stock Market

Updated: Dec 6, 2022

A Gift from Grandma

When Alyssa was still a girl, her grandmother gifted her 10 shares of stock in the Coca Cola corporation (KO). “Don’t sell this stock.” she told Alyssa. “When you are my age, you can pass it on to your most responsible grandchild.”

That generous gift started Alyssa on a lifelong journey of steadfast financial management and investing for herself and her family. This is her story.

In 1990, $227 bought 10 shares of KO. Grandma set the dividends to DRIP (automatically reinvest) and she and Alyssa left the stock alone.

As Alyssa grew up, went to college and started her first job, she sometimes thought about selling the KO stock and using the funds for things she wanted or needed, but she honored her grandmother and let the position grow in her account.

By 2022, the stock was worth $9670. And every year, Alyssa’s KO stock generated a cash dividend of more than $300, which she continued to DRIP.

Responsible Adulting

When Alyssa started her first professional job, she accepted her employer’s offer to match 6% in a 401(k) account. Every pay period, she contributed 6% of her salary to the account and her employer immediately doubled it. Her choice of a balanced mutual fund, and dollar cost averaging by investing every month, helped her grow the value of her investments steadily.

She also opened a Roth Individual Retirement Account (IRA) and selected a few Exchange Traded Funds (ETFs). At first, Alyssa couldn’t afford to “max out” or make the maximum contributions allowed by the IRS to her IRA, but she made a commitment to add a small amount of funds to her account every month. Every time she got a raise in her salary, she raised her investment amount as well.

She lived within her means, kept driving her serviceable, but not fancy, used car, paid off her credit card every month, created an emergency fund of 3 months of expenses, planned ahead for her predictable, periodic insurance, health/dental care and car maintenance costs, and started saving for a down payment on her first home.

And in her regular/taxable brokerage account, she left the Coca Cola stock from her grandmother alone. Every three months, her quarterly dividends from KO bought her more of the stock, which increased her dividend for the next quarter which then bought her even more shares.

Honoring a Legacy

When Alyssa’s grandmother passed away, she provided a $25,000 gift for Alyssa in her will. Alyssa was heartbroken to lose her beloved grandmother and was committed to using the financial windfall wisely to honor her.

She added $10,000 to her home-buying fund, reaching her goal of a 20% down payment on a starter home. She contacted a Realtor to begin looking to buy. Alyssa knew that, unlike her car, a home would be an appreciating investment that would add to her net worth.

With no credit card debt, a solid emergency fund in place and money saved for a down payment on her starter home, Alyssa wanted to invest the remaining $15,000 from her grandmother in the stock market. And she wanted to learn more before she made her investing decisions. Alyssa was careful with her money and her grandmother would have expected her to be an informed steward of the generous gift.

Up until now, other than the KO stock, all of Alyssa’s investments were in mutual funds and ETFs in her two retirement accounts. She had heard of other ways to invest, but she didn’t really understand how to do it. She wanted to increase her developing wealth, but she was hesitant to take on too much risk.

Understanding the Stock Market

Alyssa likes to understand what she is doing, so she started by researching the stock market before she put her money on the line. She wanted to better understand what “the market” is, which companies she could invest in, how she could buy and sell stocks on her own, what dividends are, and how to read a stock price chart.

She spent a lot of time reading and looking up terms on Investopedia, which was a great resource. Every time she found an unfamiliar term, she wrote it down. Her list got pretty long. The list included “The Dow,” index funds, mutual funds, exchange traded funds, trading platform, broker, publicly-traded, ticker (and many of the other terms highlighted in this writing).

But Alyssa quickly realized that she wasn't even sure what questions she needed to be asking. She was getting overwhelmed and having some difficulty filtering out the most important information she needed to get started, and she got a little frustrated.

Alyssa didn’t want to hand her grandmother’s money over to someone else to invest for her, and she certainly didn't want to pay a financial manager to do something she knew she could learn to handle herself. But she had heard that “time in the market beats timing the market,” so she didn’t want to spend a year trying to figure out what she needed to know. She decided to find a mentor to help her.

Where to Learn?

Alyssa looked online for courses. Many of them contained much more information than she needed, or even had time to process. She was not looking to spend 100 hours learning advanced charting and technical analysis! She just wanted the basics so she would understand enough to get started with confidence.

Alyssa wanted to understand the news she heard about the market and investments she was considering. She wanted to know how to choose stocks and funds that matched her investing goals and risk tolerance, and how to buy them in her account.

She finally found a teacher who would give her a concise overview of the information she needed, including a list of essential terminology, and step by step instructions for choosing a broker, setting up an account and placing orders to buy what she wanted. It was money well-spent and cost her much less than paying a financial manager.

Getting Invested

Alyssa chose a total stock market ETF, a dividend ETF and a tech-focused ETF to invest in. Because she feared a possible recession, she hesitated to put all her funds into the market at once. She had learned about the benefits of lump sum investing vs. dollar cost averaging, and she decided to take a hybrid approach. She placed market orders for about half of what she wanted to invest. Then she wrote limit orders to buy more shares if the prices pulled back. She set her limit orders as “good til canceled” and waited to see if the price would drop enough for the trades to execute.

But Alyssa also saved some of her funds in cash in case another good investing opportunity turned up.

Now, when Alyssa looked at the positions, orders and balances in her regular brokerage account, she could see that she owned KO stock and three ETFs. Her cash balance showed funds available in case any of the three limit orders executed, and she had some extra cash she was saving for another opportunity.

Learning to Use Options; Alyssa Sells a Put

Alyssa had been managing her account for about a year when she decided to learn to use stock options as part of her investing practice. She had heard about options, but she mistakenly thought they were always very high-risk trades. Her mentor told her that options could actually be used to reduce her risk and help her buy stock she wanted at a discount.

So Alyssa learned to sell cash secured puts as a way to pay less for stock. After she learned the basics about options contracts and had an idea how they worked, her mentor walked her through her first trade with step-by-step instructions. Of course she sold her first put on Coca Cola (KO)!

This is what she did.

Alyssa wanted to buy 100 more shares of KO, but the current share price of $63.17 was just a little more than she wanted to pay for it.

So Alyssa checked out the options chain on her online broker's website and found a strike price and expiration date she liked.

  • She sold to open a put,

  • expiring in 78 days,

  • with a strike price of $62.50.

  • She received $190 in options premium.

  • She made sure she had $6250 cash collateral on hold in her account to secure the put, and

  • The $190 from the sale was added to her cash balance.

78 days later, the option contract (put) would expire and one of two things would happen.

1) If the contract was in the money, Alyssa would be assigned to buy 100 shares of KO and pay $6250 for it, or

2) If the contract was out of the money, it would expire worthless. Her obligation would end and $6250 of her cash would be freed up to use for something else.

Either way, since Alyssa knew she could keep the $190 she was paid up front, she would be happy with the outcome.

Alyssa thought this process sounded too good to be true. This new way of buying stock opened some opportunities for her and she continued to add funds to her account, sell puts to raise cash and to buy stocks and funds.

Selling Covered Calls

Alyssa was primarily a “buy and hold'' investor, but occasionally she decided to sell shares of stock. She sometimes wanted to reduce the size of one of her positions to diversify her holdings or, so she could lock in profits and use the funds for another investment.

So Alyssa learned about covered calls. She could sell calls to make extra money using stocks and ETFs she already owned as collateral. Selling calls sometimes results in being assigned to sell stock, and Alyssa was still building her portfolio, so she sold more puts than calls.

In order to sell covered calls, it’s necessary to own 100 shares of the underlying stock or ETF, but there is a risk that she could be required to sell her shares at the expiration of the contract. Alyssa could choose a strike price that would ensure a profit if she was assigned to sell her shares, but she was still more cautious about selling shares than buying them.

Alyssa owned almost 200 shares of KO that she could have used as collateral to sell a call, but she had made a commitment to her grandmother not to sell her KO stock. She decided not sell covered calls on KO because she did not want to risk having the stock called away from her.

Instead, Alyssa sold a covered call on SCHD, a dividend ETF she owned. She had paid $72/share ($7200) for 100 shares of SCHD and the current share price was $79.01. SCHD paid a dividend of more than $0.63/share, and there was an ex dividend date coming up in December. So Alyssa decided to sell a covered call with an $80 strike price, expiring in January.

She sold to open the call and received $101 cash. In 47 days, one of two things would happen.

1) If the call went in the money, Alyssa would sell 100 shares of SCHD and receive $8000 for it, or

2) if the call was out of the money, the contract would expire worthless and Alyssa would not be required to sell her shares.

Either way, Alyssa would keep the $101 she was paid at the opening of the contract, and she would receive a dividend payment of more than $60 after the December ex dividend date.

What Next?

Alyssa was feeling really good about her new investing knowledge and the multiple ways she had to boost her portfolio. Her ability to understand a stock chart, research dividend dates and sell puts and calls to supplement her earnings were all working together to build her wealth and add to the legacy entrusted to her by her grandmother.

But she knew there was more to learn. Alyssa next plans to learn how to:

  • Roll a put out to a later date to avoid being assigned to buy stock, or to make more cash before she accepts assignment,

  • Calculate her annualized returns on options positions and

  • Keep track of her options campaigns to calculate her breakeven point.

And she will teach her teenage niece how to invest, so they will be ready when it's time to pass the baton to the next generation.

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