There are many ways in which you can take that chunk of cash you’ve got stashed away and invest it somewhere so that it can grow. You can open a savings account and start accruing interest, buy gold to protect against inflation, open a business and create a new stream of income, or you can even consider getting into the real estate market.
Regardless of how you do it, investing your money, no matter how little you may have, is a smart way to plan for the future. Ultimately, you are creating a financial security net to build a family and increase the quality of life in your post-retirement years.
Every form of investment has its upsides and its drawbacks. Some provide security but little room for growth–like a savings account. Some have high potential but involve an equally high amount of risk–like opening a business. Finally, some are prohibitively expensive to get involved in–like real estate.
Then there’s the stock market: an investment strategy that admittedly has a decent learning curve but is one of the most effective and popular ways to grow wealth. According to a recent Bankrate survey, stocks are the most popular long-term investment strategy in America today, and for a good reason.
Why Do People Invest in Stocks?
While it comes with its own set of risks, just as any worthwhile investment will, the stock market is among the most affordable, high growth potential investment strategies at your disposal. And contrary to popular belief, you do not need to be a genius to succeed with your market investments.
At this point, you’re probably asking yourself, “Why do people invest in stocks over other investment strategies?”
To answer that question, here’s a comprehensive guide to all the benefits of investing in the stock market:
Make Your Money Grow
Growth is the main reason why anybody invests their money. Instead of stashing it away in a shoebox under the bed and letting inflation hurt its value, putting money into the stock market allows your money to grow.
The average long-term stock market investment yields a return of 7-10% annually. Compare that to the average American savings account interest rate of .05%, and it’s a no-brainer which of the two is the more profitable investment.
With a $1000 investment, you stand to double your money over ten years by investing in the stock market. Comparatively, stashing that same amount in a savings account with an interest rate that’s twenty times the national average will yield you $100 in ten years.
Of course, there is far more risk involved in stock investments than in a savings account, but the stock market has historically always risen over the long-term. Provided you’re willing to stick with it through the short-term ups and downs, well-placed stock market investments are a relatively safe bet to yield you considerable returns throughout a 5, 10, or 20 year period or longer.
To Make More Money: Inflation Devalues Your Money Over Time
It may sound counterintuitive initially, but even if your profits are significantly below average, putting your money into the stock market can prevent it from losing value. Yes, you can wind up losing money if your stocks tank, but that’s the risk that comes with your investment. However, simply holding onto your money will inevitably lead to devaluation due to inflation.
The average inflation rate is 2-3% annually, meaning something that costs $100 today will cost you $120-$130 ten years from now. That money in your wallet may look pretty much the same in a decade, but it will not be worth the same.
To better put it into perspective, the average cost of a home in 1965 was $21,500. The average price of a home today is $340,100 higher than that. In other words, there may be risk involved in investing in the stock market, but uninvested money is certain to lose value.
Inflation Is Inevitable: Stocks Earn More Than Other Investments
You know now that the average long-term stock investment can earn you 7-10% annually and that the average annual rate of inflation is 2-3%. Now take a look at the average yearly return on some other popular forms of investment:
Savings Account – .05%
Government Bonds – 5-6%
Certificate of Deposit – 2.4%
Treasury Bills – 3.4%
As you can see, the average annual return for all of these investments is nowhere near what investing in the stock market offers. Of course, there are varying levels of risk involved in these investments, and the stock market is generally the most volatile of the bunch. However, that risk can be mitigated with smart investments and, as you know, the market historically rises in the long term.
Other Investments Can’t Compare: Help Plan For Your Future
One answer to the question, “why do people invest in stocks?” is that some people just like to gamble. Short-term trading can be just that: a risky way to turn a significant profit in a short period. But for those of us looking to turn our money into future stability in a more measured and secure manner, long-term investing in the stock market can be a terrific option.
Whether you’re planning to start a life with someone and build a family, thinking of a college fund for your future children, or looking to grow your retirement nest egg, investing your money in the stock market is a great place to start.
Because It Can Make Their Future Brighter: Diversify Your Portfolio
The safest bet to protect your money while still affording it a chance to grow is to spread it among many different investments. This is what’s known as diversification. Diversification hedges against the volatility of whatever market you’re investing in by reducing your reliance on it.
For example, if you put all your money into bonds, and the bond market takes a considerable dip, so does your money. It sounds obvious, but once you’ve learned that the stock market tends to rise when the bond market falls, then you will see the wisdom in keeping a balanced portfolio.
The stock market is an opportunity for diversification in and of itself, too. You can spread your money out to a wide array of businesses or even to a wide array of financial markets so that your financial future doesn’t hinge on the success of a single company.
To Protect Their Investments While They Grow: You Can Earn Dividends
Certain companies offer something called dividend stocks. When you own dividend stocks, you receive a payout, usually quarterly, based on a certain percentage of your investment. That means you receive a portion of that company’s earnings for merely investing in them. And if the company’s value rises significantly, you’re going to earn more money, too. Dividend stocks are a great way to offset a bit of the risk involved in your stock market investments.
Because They Pay: It’s Not As Hard As You Think
You already read above that there is indeed a learning curve when it comes to an understanding of the stock market, but that doesn’t mean you have to hold a Ph.D. in mathematics to make great investments. It just takes some time, effort, and a little bit of money, of course.
There is a tremendous amount of information on investing in the stock market at your disposal. From books to podcasts, videos, lectures, and online guides, everything you need to know is at your fingertips if you’re willing to learn. You can even get expert stock picks sent to you daily to keep you from exhaustively researching every company on your radar.
Getting started isn’t all that hard, either. Just open a brokerage account, or simply download an app like Robinhood, deposit some funds, and you can begin investing immediately.
Because It’s Pretty Easy To Do: Technology Has Made It Even Easier
For those who find the proposition of learning all there is to know about the stock market too daunting a task, there are alternative investing methods in the stock market to explore.
Robo-advisors are a growing trend in the world of investing that can reduce an investor’s workload to almost nothing. These digital investing platforms run computer algorithms using your financial information and investment goals to help them determine where to place your money in the stock market.
The price of a robo-advisor is fairly low, and many traditional brokers now offer them to clients, but they do come with a few setbacks. For one, you can’t exactly discuss your financial future with a computer, at least not in the way you might with a human financial advisor. They also don’t allow you to do any hands-on investing, like buying individual stocks, once you’ve started to get the hang of how the market works. Still, they provide a relatively safe, reliable, low-workload method for growing wealth through the stock market.
Because They Can Hire A Computer To Do It For Them: You May Already Know How
Perhaps, the most fundamental aspect of investing in the stock market is researching companies to determine which of them may be undervalued or have high growth potential. This involves some number crunching and analyzing annual reports, but it also involves a general understanding of the company itself and the industry in which it operates.
A common piece of advice given to new investors is to put their money into companies they know. That’s not to say you can’t go out and learn all about an unfamiliar industry and possibly even become a master of all of its various complexities; it just means that you’re far more likely to be successful if you rely on your experience when seeking to invest.
If you’ve worked in a particular industry for many years, or if there’s a company you’re interested in, you’re ahead of the game as far as knowing how and when to invest. Not only does this give you an advantage in investing, but it also adds a dimension of interest to your forays into the stock market.
It Involves Things That Interest Them: Investing Can Be Educational and Entertaining
The stock market is a unique way to understand the world around you. Many of the businesses listed on the Dow Jones Industrial Average or the S&P 500, or any index for that matter, are businesses you interact with all the time. Learning about the stock market means gaining a better understanding of these companies and business as a whole.
Investing in these businesses means you’ve got some skin in the game. Their successes and failures have a direct impact on you. As a shareholder, you’re allowed to vote on things that will affect the future of the company. In other words, your investment can affect more than just your net worth.
It’s about more than money: In Conclusion
As you can see, there are a ton of reasons why people invest in stocks. Whether it’s to grow wealth, avoid inflation, plan for their future, or just for fun and to learn about familiar businesses, investing in the stock market is one of the best things you can do with that extra chunk of change you’ve got saved up.
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