Why You Should Invest in the Stock Market
It's pretty much impossible to predict the moves of the stock market, but amidst the unpredictability, the benefits of investing in stocks remain unchanged. What has changed—or needs to change—is the investing 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 whether you're a fledgling or a more experienced investor.
Investing Is More Affordable Than You Think
Investing in the stock market is a well-worn path to making money work harder, but you don’t have to fork over thousands of dollars to get your feet wet. You can begin by setting aside the few dollars you would normally spend on a daily latte and investing the monthly total in stocks or an index fund. It’s a virtually painless way to use your earnings in service of your future.
Consider dividend reinvestment plans (DRIPs), which are offered by hundreds of major companies and don't require much money, effort, or experience.
Once you own at least one share or fractional share of stock in a company that offers a DRIP, you can sign up for the DRIP and skip paying broker commissions by buying additional shares directly from the company or its agent. Any dividends earned by your stock are automatically reinvested in more shares or fractional shares, which ideally earn dividends of their own. This means that over a period of years, your stock holdings and earnings have the ability to compound or grow at an accelerating rate without your having to shell out more money or keep tabs on your investment.
Inflation is not your friend when you’re trying to save for a major outlay, like buying a house or financing a comfortable retirement. Consider that the historical inflation rate in the U.S. hovers at around 2%. Then think about how this could eat into the purchasing power of money that's sitting in a certificate of deposit (CD) or savings account. It would have to earn at least 2% just to keep up with inflation. Unfortunately, even high-yield savings accounts don't offer rates that high right now.
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 historical inflation rate. But your money is tied up for the term of the CD, which may range from 30 days to 10 years.
And in the event you have to withdraw your money before the 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 not necessary 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 in spite of the stock market's volatility, 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
Diversifying 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 inherent volatility of the financial markets. Oftentimes, when the stock market is down, the bond market is up and vice versa. What this boils down to is that you can better control volatility where you're concerned by spreading your money around.
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 where you and your plans are concerned. 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. The rich and famous 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 little research and a solid understanding of the basics such as 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, rich, 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. They include researching companies you're considering investing in (which means reading their annual reports, which you can often find by poking around their websites), regularly setting aside some money to invest, and understanding fifth-grade math, including addition, subtraction, multiplication, division, and working with fractions and decimals.
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, be realistic about your goals and expectations, and figure out how to use the information that's available to you to your best advantage.
Get a better handle on the market by play buying and selling for a while as preliminary training to see how you do before you jump into the market. And keep in mind that although the stock market may seem unforgiving at times, investing can also be an interesting and possibly lucrative endeavor.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Board of Governors of the Federal Reserve System. "Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run?" Accessed Sept. 1, 2020.
U.S. Securities and Exchange Commission. "Saving and Investing," Page 12. Accessed Sept. 1, 2020.