5 Reasons Why People Invest in Stocks

5 Reasons Why People Invest in Stocks

Don’t be afraid to dive into the world of stocks. With a bit of knowledge and effort, you could be earning great returns.

When it comes to investing, you can put your money into savings accounts, bonds, real estate or even art. Out of the most common investment options, many see stocks as a riskier proposition than more stable options like bonds or real estate. Stocks are a type of financial asset representing an ownership stake in a company. When you buy stock, you become a part-owner of the company and are entitled to a share of its profits. 

Despite the risks, the stock market is still a popular investment playground. If you’re looking for a product with long-term growth potential and protection against inflation, stocks may be a good option. Let’s explore why stocks can be an excellent investment option. 

1. You can start investing with little money

Many people think they need a ton of money to start investing in stocks, but that’s not the case. There are several reasons why it may be advantageous to start with smaller investments. First, you won’t lose everything if the market takes a downturn. If you put a large sum of money at once in the stock market, you will likely “panic sell” your shares if the economy is not looking promising. Besides, starting small allows you to build up your portfolio slowly and learn about different types of stocks and how they work before putting a lot of money into them.

Besides, as you can buy as little as one share, you can invest in a variety of stocks to minimize your risk and maximize your chances of making a profit (more about diversification in the next section).

2. You can diversify your portfolio easily

When you invest in stocks, you’re not putting all your eggs in one basket. Diversification is important because it helps mitigate risk; if one particular stock isn’t performing well, the others may make up for it. Unlike real estate or art, you can easily diversify your portfolio across various sectors with stocks. It protects your portfolio from experiencing too much volatility and maximizes your chances for overall growth in the long run. 

For example, if an airline experiences an indefinite pilot strike, the stock prices of all airlines will drop. However, if you invest in different stocks, you can counterbalance the effects of bad news in one sector with positive news in another. So, if airline stocks drop, stock prices of railways may rise as passengers look for alternative modes of transportation. We can say that diversification is a proactive way to balance your portfolio and protect your investments. 

3. You don’t have to be an expert 

For many people, the stock market seems like an alien world full of jargon and complicated rules. But the truth is, anyone can invest in stocks—you don’t need to have a degree in finance or years of experience. As per American investor, mutual fund manager and philanthropist Peter Lynch, “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade maths, you can do it.”  

Best-selling author and CNBC contributor Suzy Welch also said that sometimes your instincts could be just as good as someone studying the stock market for years. Also, there are many tools available today to help even the most novice investor. “You can have these tools that are online or whatever, and you can figure out a way to save and have a financial plan for yourself,” said Welch. 

For example, you can use online stock simulators to practice investing before putting real money into the market. You can also follow stock news and commentary from financial professionals to better understand which stocks are worth investing in. When you feel you’re ready to put your money in stocks, you can build your portfolio with the vast number of mobile apps and online platforms available, like Robinhood and Acorns. By taking advantage of these resources, you can start investing in stocks with confidence—even if you’re not an expert.

4. Stocks provide long-term returns 

When you invest in stocks, you’re buying a share of ownership in a company. As that company grows and becomes more profitable, the value of your shares will increase. Over time, this can lead to significant growth in your investment. 

For example, since 1926, the average stock market return has been around 10% per year, while long-term government bonds have returned 5% to 6% per year. That’s why stocks are often considered one of the best long-term investments—if you’re patient and willing to ride out the ups and downs of the market, you can potentially see some great returns on your investment.

5. The benefit of liquidity helps in achieving short-term goals 

Stocks are generally very liquid, meaning that you can easily sell your shares for cash if you need money for an emergency or other unexpected expenses. You can also invest in stocks with a goal in mind. For instance, let’s say you’re looking to buy an office space or home within the next five years. In this case, you might want to consider building a portfolio designed to be liquidated in five years. 

The stock market is not without risks

After all, investing in stocks is making a bet, and it comes with a fair share of risks, including market risk, liquidity risk and political risk. For one thing, the stock market can sometimes be turbulent, so you could lose money if you’re not careful. In 2022, the stock market is considered one of the most volatile on record, seeing a 20% decline year-to-date in the S&P500 (a stock market index tracking the stock performance of 500 big companies listed in the U.S.) and a 30% drop in Nasdaq Composite (which tracks the performance of almost all stocks listed on Nasdaq) as of June. 

Moreover, depending on where you are, you might have to pay capital gains taxes when making profits from selling your stocks. You can also constantly be on an emotional roller coaster when holding stocks, given that it’s more of a long-term investment. Additionally, you could lose all of your money if the company you invest in goes bankrupt. 

Like any investment, if you decide to dip your toe into the stock market, do proper research before investing your hard-earned money. 

This article is meant for informational purposes only. Please make investment decisions based on your own discretion. 

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Header image courtesy of Freepik


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