The benefits of investing in stocks can come in different forms.
Although it’s considered “risky” when compared to its peers, it draws attention to investors and traders alike.
My mentality before was to completely stay away from risk and go for safe assets but the thing is every investment has some risk to it.
So why not invest in something that will yield greater returns even though it carries some type of risk?
Where do you think the richest men in the world got their wealth?
I’ve read and researched a ton of resources about the rich and how they built their wealth. What I found out is that most of them acquired a big percentage of their money in the stock market.
The stock market has created wealth for a lot of investors whether they are small or big time.
If you haven’t considered investing in the stock market yet, by the end of this article you’ll be learning more about it and hopefully open an investment account 🙂
Benefits Of Investing In Stocks – 12 Reasons To Start This 2020
The stock market is the ultimate equalizer, it doesn’t care about your degree, whether you were born rich or poor, and how much research you’ve done, the stock market will do whatever it pleases.
When you buy a stock the result is always binary – its either the stock goes up from your buying price or it goes down from there. It’s either you make money or you lose money.
Investors who stay long enough in the market usually end up making money.
Just looking at the index alone, people who invested in 2000 – 2009, have at least doubled or tripled their investments already.
You might think that doubling or tripling your money is a bit small in a span of 10-20 years, but imagine if you continued to invest money while you were working…
Not only were you getting active income but you were making money on the side – with no sweat! And that’s what passive income is for you!
To finally convince you to invest your money in the stock market, I’ve listed below the different benefits of investing in stocks! ?
1. You’re Beating Inflation
Inflation is the increase in price of goods and services throughout the years. For sure you’ve experienced inflation already but you might not have noticed it.
Remember the time when $50 can buy you a lot of food in the grocery? Now, that $50 can only buy you two meats that can last for a week and a half.
If you let your money stay idle in your closet and inflation happens annually, the value of that money decreases over time.
So you want to put your money in investments that can beat inflation.
Stocks can do that for you.
According to NerdWallet, the annual average stock market return is 10%.
To look at an interactive chart of the returns of the S&P 500 throughout the years, you can check out this chart of MacroTrends.
Basing on that chart, here’s the data of the S&P 500 from 2001 to 2020.
Just by looking at this data, you already know that there are more positive years than negative ones in the S&P 500 or the whole US stock market in general.
And those negative years in the market are caused by bubbles, terrorist attacks, and the failure of the financial system.
To know more about the down years in the stock market, you can read my post about The Largest Stock Market Drops And How You Can Benefit From It. There I’ve written the reasons behind those negative years and how you can benefit from it.?
So how does this data relate to beating inflation?
The average annual inflation rate of the US is 2%. Comparing it to the data above, a year in the stock market is way above 2% which means you’re beating inflation by a mile!
2. You’re Part Of A Growing Economy
The US economy is for sure at the top 3 biggest economies. Which means the country is continuously progressing and expanding.
One economic indicator that a country is progressing would be looking at its GDP.
A GDP or growth domestic product represents the total value of a country’s goods and services.
Basically, GDP shows how productive a country is.
Here’s a GDP chart of the top 2 economies in the world:
Looking at that graph, the GDP of both countries has been going up since 1960.
That graph tells us that China and US have been progressing as a country every year.
So are China and the US the only ones that have been leveling up as a country?
Nope, there are countries that are slowly building their economy to be considered as top economies in the world. They are what we call emerging markets.
Emerging markets are developing nations that are becoming global participants and doing trades around the world.
These countries are in the process of becoming a developed country, which means they are slowly getting the characteristics of a developed country but not quite there yet. Which is a good thing! Why? Because they have more room to grow as a nation!
According to Morgan Stanley Capital Investments, the emerging markets include 24 countries – Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.
The craziest thing about that list would be that China is still considered an emerging market even though they’re one of the biggest economies in the world already.
So again, you might question what does being part of a growing economy have to do with being invested in the stock market?
If an economy is progressing and growing, this means that the businesses in that country are doing well.
If the businesses listed in the stock market are healthy, then the stock market has nowhere to go but up!
Not only that, if an economy is healthy, this means people there are employed. If more people are employed and have money, this means that more consumers are spending.
If more consumers are spending, businesses make money and expand which again positively affects the stock market.
Sometimes big investors like emerging markets compared to stable ones because the country has more room to improve. And these investors would like to be part of that growth as well.
You might also ask what happens if an emerging market or a developed market goes into a recession?
If I haven’t sold my investments before the recession happened, I would just wait for the market to bottom and just hold my investments.
Because looking at the US stock market, it won’t go down forever. In fact, give it a year or two and you’ll see your investments go up again.
I’m able to wait it out because I’m in the stock market for the long run.
I have a 10+ year time horizon. Plus, if a country is facing a recession, it will do everything in its power to lift its nation back up again.
Just like what the US did after the 2008 financial crisis. In 2009 their interest rates were close to zero. Yep, zero! If you were to borrow money from the bank, there would be little to no interest at all.?
They did that to stimulate their economy.
They stimulated it by enticing its citizens to borrow money and spend it.
And again as mentioned above, if consumers have money to spend, businesses will be the major beneficiaries of this. And if the businesses are starting to make money, the economy will start building itself again.
So when investing in the stock market, it’s important to have a long time horizon so you won’t be too affected when these drops happen.
3. Easy Access To Buy and Research
Because of modern technology, gone are the days of needing to call a broker, asking them what the price is and telling them to buy shares for you.
In this day and age, you can buy stocks even on your phone. Today’s applications have made that possible for investors and traders!
With the help of the internet, you don’t need to read newspapers anymore or be subscribed to some magazines for you to know about what’s happening to companies. The internet has provided all of these things.
You can now search for a company’s financial statements, plans of expansion, debt, what their current plan is, and what their struggles are.
All of that information is available on the internet already! Plus, if you’re not into reading numbers and stories of companies, real-time stock charts are available everywhere!
Before, investors would ask a quote of a stock via telegraph and sometimes they would receive that information around two weeks! So they’re making a decision that’s two weeks delayed of what is currently happening to a stock.
But now, every second of a stock’s price fluctuation can be monitored.
4. It’s A Liquid Market
If a market is liquid, it means that you won’t be having any problems buying and selling something because there’s a lot of participants.
During the 2008 financial crash, there were a lot of houses that were taken from people who weren’t able to pay off their mortgages but the real estate sector wasn’t liquid at that time.
Institutions had a lot of houses in their possession, but no one was willing to buy.
Buying a house wasn’t the priority of many people during that time, all they were thinking was how were they going to survive – since a lot of people lost their and homes that year.
In the stock market, regardless of how much price has gone down, there will always be willing buyers. So if you’re thinking of selling your shares, there’s a high chance that you can sell it immediately.
5. Profit Sharing
When you’re invested in stocks of a company, that makes you a business partner, a part-owner, and a shareholder!
For some companies, they usually share their profits to their investors.
If you’ve bought shares of Verizon, they usually pay out dividends of $0.64 per share to investors. It’s a way to incentivize investors for believing and placing their money in the company.
Usually, the companies that give dividends to their investors would be stable and established companies.
Investors like dividend-paying companies because that’s a sure way to get an ROI aside from capital gains.
Here are 5 reasons as to why dividends are appealing to investors:
a) Dividends increase over time
Dividends aren’t stagnant, if a company is growing and expanding, it would be unfair for investors to receive the same dividends.
So as companies grow bigger, their dividends go up as well.
b) Dividends are still given even though the company isn’t profitable that year
Nothing is assured in the stock market. A price of a company can go down and up. But with some companies regardless if they earn that year or don’t, they still guarantee their investors dividends. Again, it’s like repaying the investors for their trust.
c) Dividends lessen stock price volatility
As mentioned earlier, companies that usually give out dividends are profitable which means they have more money coming compared to what they’re spending. This gives investors confidence that the company is fundamentally great.
d) Dividend-paying stocks are safer
To illustrate this reason let’s say you’re choosing between Company A and Company X who’s priced at $10 per share.
You don’t know the fundamentals of the companies and you’re not sure whether who’s going to go up in value or go down.
But you do know one information – Company A gives out $0.10 dividends per share every year.
So which one is a bit safer? Company A is because the dividend payment is already guaranteed.
e) Dividends can supplement investments in beating inflation
In the stock market, nothing is guaranteed. There’s always a probability that previous data can’t be mimicked by current data.
If your return on investment has been only at 2% and the inflation rate was 2.5%, this means that you haven’t beaten inflation. But if you invested in a stock that gave out $0.50 dividend per share, that adds up to your ROI.
Another benefit of investing in stocks would be the opportunity of diversifying your portfolio.
What some people do, they invest in stocks and bonds. They invest 30% to bonds and 70% to stocks. While there are others who invest 60% to bonds and 40% in stocks.
Either way, whatever asset allocation percentage they do, it still diversification.
Diversification is done when an investor wants to reduce the risk of being too exposed to once asset class. Being too exposed means your investments are too focused on one asset class.
Another way of being diversified in the stock market would be spreading your portfolio to different sectors.
You don’t want to be too exposed in a certain sector because you run the risk of having a negative portfolio if that sector fails.
7. Concentrated Investment
Some investors like taking risks and I totally get them.
If you’re an investor who has a time horizon of 10-15 years, you can afford to concentrate your investments in a single sector or asset class to achieve higher potential gains.
Take the investors who concentrated their investments in the tech sector, they were rewarded tremendously before the tech bubble popped.
If you’re not sure about whether you should diversify or concentrate, you should take a look at your risk tolerance.
Some investors even with a 10-year time horizon, they don’t want too much volatility in their portfolio, so they diversify it. While others like the risk because it also comes with better rewards.
Here’s what pro’s in the financial market think of diversified portfolio vs concentrated:
Warren Buffet stated that “diversification is protection against ignorance. It makes little sense if you know what you’re doing.”
What Warren means if you don’t know what you’re doing and if you haven’t done extensive research then you should go for being diversification.
But if you’re able to study sectors and stocks in great depth, then being concentrated is much more lucrative than being spread out.
Ray Dalio wrote, “diversifying well is the most important thing you need to do in order to invest well”.
Ray knows how difficult it is to make money in the market, making consistent profitable trades/investments are difficult to do. So in order to hedge that idea, he mentioned that diversifying will allow you to lessen the risk involved.
Mark Cuban believes that diversification is for idiots. ?
George Soros believes that his success in the financial world is due to his diversified portfolio. Not only is he mitigating risk but when he bets on the right industries, he gets to earn considerable returns.
Jim Rogers doesn’t believe in diversification. He stated that investors can put all their eggs in one basket but they need to be sure that it’s the right basket and they need to watch closely and carefully.
As you’ve just read, even successful investors have different takes on whether to be concentrated or be diversified.
At the end of the day, that decision will entirely be up to you.
An investment shouldn’t be the cause of sleepless nights and anxieties.
An investment should make you feel more confident about your finances.
So determine which one is for you and go with that!
8. Invest In Something You Believe In
In my previous posts, I mentioned that being an affiliate marketer of a brand that you use and love is a great way to show support. But it doesn’t end there. You can be an investor as well.
If you think that the brand is still young and has a lot more potential to grow, then you can capitalize on that belief and invest in that company.
For example, if you love Beyond Meat – a producer of plant-based meats, they just recently listed in the stock exchange on May 2, 2019.
If you believe that they can be an industry leader and a global brand, one way to take advantage of that assumption would be investing in the company.
Another example would be Visa Inc. If you believed the company’s vision that they will be the leader in digital payments and backed that up by investing in the company, your investment would’ve tripled by now!
And the last example would be Amazon. This company is a special case because you’re not just believing in the brand but you also have faith in Jeff Bezos – the founder and CEO of Amazon.
If you saw this picture before:
And how Jeff Bezos turned it to this:
You would be confident as an investor that the one who’s leading the company will always be innovative and will do anything to be the industry leader.
9. Stock Market Returns Beat Bank’s Interest Rates
Investing in stocks is much riskier compared to just letting it stay in a savings account. That’s why stock average returns can beat the bank’s interest rates.
Let’s say the average savings account interest rate is at 1% annually. If you have $10,000 in the bank, it would only get $100 every year. Now compare it to the table above, the average annual return of the stock market would at least be 10%!
That’s too big of a difference, especially since we’re just taking into account the minimum percentage return of stocks.
10. You Can Trade Stocks
Trading stocks is one way to approach the market. Traders use technical analysis to read charts. They use chart patterns, price movements, and historical data to determine the possibility of future price action.
Traders can easily buy and sell in the stock market because of its liquidity.
You can buy a stock and literally sell it the next second. Some traders buy and sell for a day only, while others have a weekly timeframe and some would hold their stocks for months before selling it.
To give you an introduction to technical analysis, I’ve written a whole post just for that. After reading that article, I guarantee you that your knowledge of technical analysis will be far better than a newbie in the market! 🙂
11. Buy, Hold And Forget About It
Buy and hold strategy is what long term investing is. Long term investing requires you to have a longer time frame with your investments.
Long term investors have a 10+ year time horizon. The phrase “forget about it” is added above because you don’t need to look at your investments every day when you’re in it for the long term.
Daily market swings shouldn’t bother you, they are just noise and just gives you unnecessary panic if your portfolio is temporarily down.
Check your investments twice a year or every year. What other investors do is that they just allocate a certain amount of their monthly budget to investments and keeps adding to it every month.
Long term investors can use technical analysis as well but most of them use fundamental analysis.
This approach makes you understand and look at financial statements and balance sheets of the company.
Fundamental analysis also covers studying corporate governance, who’s running the company, is the company in a healthy sector, etc.
To know more about the basics of fundamental analysis, take time to read my post – Fundamental Analysis For Beginners.
12. Achieve Your Financial Goals Faster
One way to reach your financial goals faster would be having another stream of income. If more money comes in and you’re able to sustain the same lifestyle, your savings will definitely increase!
Investing in stocks is usually appealing to many because it’s a type of passive income. Wherein you can focus on your day job and your money is working for you on the side.
Study More About The Stock Market Now
The benefits listed above should be more than enough for you to start reading about investing in the stock market!
I’ve written several topics about the stock market in the Make Money section of my blog. To start off your research and study, you can begin with my posts below!
- How Does A Stock Market Work?
- How To Trade Stocks For Beginners In 3 Easy Steps
- 6 Clear Steps On How To Invest In Stocks Online
- The Largest Stock Market Drops And How You Can Learn And Benefit From It
- Technical Analysis Explained – Stock Market 101 Guide For Beginners
- Fundamental Analysis For Beginners
- Bonds Vs Stocks Vs Mutual Funds – Which One Is The Best For You?
All of the information is laid in front of you, all that’s missing is for you to read them! 😀