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Why You Should Invest in the Stock Market

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It's impossible to predict the stock market's movement, but amidst the unpredictability, the benefits of investing in stocks remain unchanged. What has changed—or needs to change—is the public’s perception of the stock market and its associated risks.

In addition to investing some of your available cash in a savings account, consider the reasons why stocks continue to be a viable investment and why you should invest in the stock market.

Investing Is More Affordable Than You Think

Investing in the stock market is a well-worn path to making your money work for you, but you don’t have to fork over thousands of dollars to start. You can begin by setting aside the few dollars you would normally spend on a daily latte and invest the amount you saved in stocks or an index fund. It’s a virtually painless way to use your earnings in the service of your future.

This is even more true now because you don't need to save up large amounts of money to get started. On many investing platforms, you can buy fractions of a unit of stock in a company you like, or what is called fractioning. Many Robo-advisor and investment apps have nominal fees or costs, which also makes it easier to get started.

One of the most common investment types for new investors is a dividend reinvestment plan (DRIP). DRIPs are shares that automatically reinvest any distributions by purchasing more shares. Investing in DRIPs can save you money by keeping you from paying broker fees for transactions because the shares are repurchased directly from the company that offers the shares.

Over a period of years, your stock holdings and earnings compound and grow at an accelerating rate. DRIPs use the power of compounding interest without the need for additional funds from you.

Outrun Inflation

Inflation, the reduced purchasing power of a currency over time, is not your friend when you’re trying to save for a significant purchase, buy a house or finance a comfortable retirement. Consider that the Federal Reserve tries to keep inflation at around 2%. Then think about how this could reduce the purchasing power of money sitting in a certificate of deposit (CD) or savings account.

Any account or investment needs to earn at least 2% to keep up with inflation. Unfortunately, even high-yield savings accounts don't offer rates that high.

You can usually earn a higher rate of interest on CDs than savings accounts—and you might even be able to keep up with or slightly surpass the target inflation rate. But your money is tied up for the term of the CD, which may range from 30 days to 10 years.

If you have to withdraw your money before a CD term ends, you'll be socked with an early withdrawal penalty, which will further erode your earnings.

Grow Your Wealth

If you decide to invest in stocks to grow your wealth, understand that there’s no guarantee of how your stocks will perform. Still, it’s unnecessary to buy stock in the next Amazon or Apple to earn a respectable return.

Consider that the stock market has averaged a 10% annual return on investments, as measured by the S&P 500. This is despite the stock market's volatility and its tendency to change rapidly, which from time to time culminates in a historic crash characterized by a sudden double-digit decline in value.

Diversify Your Investments

Diversify your investments by including some stocks, along with your bonds (and other fixed-income securities). CDs and savings or money market accounts can help protect you from the financial markets' inherent volatility. Often, when the stock market is down, the bond market is up and vice versa. This boils down to an ability to better control volatility (otherwise known as risk) by strategically placing money in investments and bonds.

In other words, don't put all your money in only one type of investment.

The Market Isn’t Out to Get You

The stock market is clueless regarding you and your plans. It doesn’t have any agenda, and it couldn't care less about yours. Despite what you may have gleaned from late-night infomercials or unsolicited emails, there are no magic formulas for investing success.

Successful investors don't have any well-guarded secrets up their sleeves, and there are no secret passwords or handshakes. In truth, there's little standing between you and successful investing, except a bit of research and a solid understanding of the basics.

Some of the basics include how stock prices are set and how to apply the principle of "buy low and sell high."

You Don't Have to Be a Genius

A seasoned investor might have an advantage over you as you're getting started, but you don't have to be a math whiz, wealthy, or another Warren Buffett to invest in the stock market. Compared to investing in a franchise or creating your own business from the ground up, the requirements for investing in the stock market are modest.

Pick stocks that are issued by companies you know in industries you're interested in. This interest helps motivate you to stay informed about your investments.

The requirements for investing include researching the companies you're considering investing in, which generally means reading their annual reports (which you can often find by poking around their websites) and regularly setting aside some money to invest.

If you have an understanding of fifth-grade math—addition, subtraction, multiplication, division, fractions, decimals and ratios—you more than likely can understand investing concepts with time and research.

Take Your Time Investing in the Market

There’s no need to rush out right now and invest in the stock market. First, do your homework, set realistic goals and expectations, and figure out how to use the available information to your advantage.

Get a better handle on the market by using investing simulators for a while as preliminary training to see how you do before you jump into the market. Remember that although the stock market may seem unforgiving at times, investing can also be an exciting and possibly lucrative endeavor.

Frequently Asked Questions (FAQs)

Why is it a good idea to invest in bonds as well as stocks?

Not every investor will want to buy both stocks and bonds, but many enjoy the benefits of diversifying their portfolio with multiple asset classes. Bonds aren't guaranteed to perform well when stocks fall, but they are usually less volatile than stocks, which can help reduce your portfolio's overall volatility and improve average gains.

Why do some people invest in penny stocks?

Some investors diversify with bonds to reduce their portfolio's volatility, but others seek more volatility and higher risk/reward trades. Those investors may want to diversify their portfolios with penny stocks, which are among the highest-risk assets available with the potential for massive gains (as well as total losses). This is also true of cryptocurrencies, especially the new and very low price coins, and meme stocks. These types of investments are suitable if you like risk and enjoy gaming. You should research each investment, though, before you put your money into it.

Why would someone invest in mutual funds instead of stocks?

Many mutual funds contain stocks, but investing in them is much different from investing in a single company's stock. Mutual funds make it easy to safely diversify your portfolio with high-quality investments. Picking investments and knowing how to trade them are difficult, especially for beginners, but index funds and other mutual fund products turn those decisions over to professionals who manage your funds for a small fee.

Article Sources

  1. Board of Governors of the Federal Reserve System. "Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run?" Updated Feb. 9, 2021.

  2. U.S. Securities and Exchange Commission. "Saving and Investing," Page 12. Updated Feb. 9, 2021.