Despite all the latest turmoil of the stock market during the Great Recession of 2008, as we now call it, investing in stocks remains the premier means to investing.
The stock market tends to have volatile performances in times of any economic uncertainties, but that is why it is a good barometer for the economy. The stock market in general will always deliver long-term returns, just as the economy eventually advances after trying times.
No other investment vehicles are as closely and directly related to the many aspects of an economy as the stock market. As risky as it may seem, the stock market is still arguably the most rewarding investment place.
Two critical elements are worth considering in answering “why invest in stocks?”
Long-Term Capital Appreciation
Real wealth creation comes from growing investments not out of earning only fixed interests or dividends. For $1,000 invested in Berkshire Hathaway in 1964, the investment would have grown to $8 million in value today. Results on smaller scales compared to what Warren Buffett has consistently delivered are certainly achievable with other long-running corporate America stocks.
At around 15 percent annualized return, an investor who started with $1,000 elsewhere could also have become a millionaire after the same length of time. No bonds of any kind can reach such a level of growth as any price appreciation in bonds depends on the few single-digit changes in market interest rates.
Investment results from real-estate investing could on the other hand vary widely as no uniform market pricing mechanism exists, especially considering the transparency and efficiency of the stock market. When it comes to investment growth, the stock market delivers.
Short-Term Trading Advantage
Investing in stocks is often said as owning a piece of business.
On a fundamental level, it is very true.
Investors, institutional or retail, analyze companies in different sectors and industries in search for both value and growth stocks. Whenever investing is detached from the underlying business, it becomes the trading of mere ticker symbols.
However, having designed a solid, business-focused investment plan, it would be foolish not to take advantage of trading opportunities.
Trading has become increasingly convenient for investors at any level. Buying and selling stocks can be done with only a mouse click and in the comfort of one‘s home, while other investing such as bond trading is not nearly as accessible to average investors. Market volatility makes stock prices of even good businesses rise and fall on their way up.
Investors with an eye on trading allow themselves to generate higher returns. If an investment stays all the way in, it may produce only 15 percent. But if, from time to time, an investor tries to sell at near tops and then buying back at close to bottoms, such a trading element incorporated into investing may help turn a boring 15 percentage rate into an awesome 60 percent.
Buyer Beware
Though stock investing has, at times, clear cut advantages to other investment vehicles, there is still substantial risk if the investor doesn’t do his homework. One still needs to do their research and understand the value of the company they are buying into.
I was actually just thinking about this last night. I actually am quite frustrated in my investment returns. In 1999 I rolled over what I had in my 401k, and the amount today is not much different. However, if you went by traditional investment returns, the amount should have easily doubled by now. I guess I graduated college at the wrong time.
The S&P hasn’t done a whole in the past decade but that’s not to say that stocks have done badly or that they won’t rise in the years and decades to come. There is always a risk in stocks but it tends to be one of the better investment vehicles out there.
I agree that investing in stocks is generally the best investment option for most people. The key is to be educated about what your are doing and be diversified. Uneducated investors need to learn what they are doing, by reading blogs like this and other sources, before they put a lot of money into something that has a possibility to lose value.
As much as people don’t want to, they have to familiarize themselves with investing practices and learn how to do some research on their own.
Investing in stocks is still a little foreign to me. Right now I’m focusing on building up my ROTH IRA before I take a dive into the land of stocks.
How are you investing in your Roth IRA? You may be in stocks already.
I’m not a 100% sure, I should check on that and get back to you.
Hope I didn’t come across condescending there. Just meant to say that many mutual funds and such are already invested in stocks. You don’t have to buy an individual stock to invest in stocks.
Don’t worry about it. I don’t think my Roth IRA is investing in stocks though (or that it was an option…)
When you hire a stock broker, do they make recommendations for you? Or do you have to go to them with some idea of the companies you want to invest in?
Also, if you choose not to use a broker, what is the best online resource to buy and sell your stocks on, in your opinion?
This really is a great investment opportunity, but I’m still trying to learn as much as possible about it before I start investing. One of the terrifying and great things about stocks is that you need to invest a lot of money in order to see any kind of significant returns. That can mean you either make a lot or lose a lot.
A broker will tend to make recommendations for you. Many times the recommendations may not be in your best interest but rather be in the interest of the brokerage firm the broker works for.
A fee only advisor may be a better bet if you are looking for someone to guide you.
Many of the online brokers are great to buy and trade stocks, funds, and ETF’s – TradeKing, ShareBuilder, Zecco – are just a few. You can also find tools for picking and tracking investments.
It’s great that you want to learn as much as you can but you really don’t need to invest a lot of money. Back in the day, yes, but today you can invest in partial shares in any amount you like (most cases). A company like ShareBuilder will allow you to buy fractions of a share if the company is too expensive. Wanna own a piece of Google without paying hundreds for one share? You can!
That’s not to say you should just jump in, just saying you don’t need a huge bankroll to get started.
You also don’t need to invest in individual stocks. You can invest in a mutual fund or an ETF that tracks something like the Dow or S&P.
I have very little confidence in myself to pick stocks. I am invested 100% in stocks within my index funds, so I have no problem taking a more risky approach, especially because I’m young.
I’d like to put a few thousand in a stock and see where it goes, but where should I be getting my advice? I trust others who do this for a living, but at the same time I don’t know what their motives might be.
It comes down to educating yourself and learning to read a company’s financial statements and seeing how the company is doing in general. Why would a company make more money in future years? Is it at the top of it’s market? Is there something that differentiates it from other’s in the market so that the company will keep earning.
Yes, it’s work. But with the work comes the rewards.
And who’s to say that index funds aren’t your best bet right now anyway?
IMO Investing in stocks will always be one of the best ways to increase your wealth. An investor just needs to make a complete research about what he’s buying, and think on the long term.
Then, he needs to ignore the noise. That’s all.
If only ignoring the noise were so easy!
Truth! Fortunately it gets easier with practice and experience 😉
So the sooner a person starts investing the better.
A great and simple article. I like investing in the stock market. I am no expert but I have done a lot of research and spent quite a bit of time on it. If you like the subject, understand the basics of accounting and are willing to invest a bit of time in it, and money of course, it has the potential to really deliver for you.
One important advice is to know how much you can loose and stick with it. It is also important to ensure that you know what you are buying so you get into trouble.
Ignoring the noise is also hard as mentioned above.
One advantage of investing in stocks as opposed to real estate is the initial capital. I started my portfolio with $1K only. There is no way I could buy real estate with that.
By the way, thank you for submitting this article to my weekly compilation. Hope to see another one soon.