Investing is the best way to gain financial stability, avoid inflation, achieve your dreams and rub shoulders with the rich & famous.
The problem is that for far too long, the stock market has been a 'private club' that only the elite have had access to.
The stock market is viewed as 'risky' or 'intimidating', especially when it comes to investing in stocks.
The good news is that things are changing. There are now dozens of investing apps and companies offering professional-grade investment advice for every day investors.
It's never been easier to start investing. But why should you? Let's take a look.
8 reasons to invest in stocks
1. Tried & tested market
Stock markets have been around for 400 years, making them well-regarded and regulated. Plus they've been tried and tested thousands of times over.
If you look at the S&P 500, a listing of the 500 largest publicly traded U.S. companies, there have been many short-term fluctuations. But over a long time horizon, you’ll find that the stock market has proven beneficial to investors.
Goldman Sachs said the past 140 years of returns averaged 9.2%, with a 13.6% annual return between 2010 and 2020.
2. The stock market is incredibly liquid
A market that is liquid is clear and free flowing. In simple terms, this means that there is almost always someone willing to buy or sell a share at a given point.
In a liquid market, you don’t have to worry about being stuck with something you want to sell, with no one wanting to buy it.
Although the overall market’s liquidity shifts, there are ways to determine how liquid an individual stock is. You can easily look up a stock’s average daily trading volume, which is one indication of high liquidity.
3. You have the potential to earn dividends & capital gains
When you invest in a stock, you can sometimes receive dividend payments. While the percentages are usually small, these payments can quickly add up.
A dividend is a portion of a company’s profits that's then paid out to shareholders on a regular basis. Dividend investing helps you to build an income stream that isn’t dependent on selling a particular stock. (Not all company’s stock pay dividends, though.)
Pro tip: With most brokerages, you can set dividends to reinvest. So, you can buy more shares rather than taking out the cash. If the company is thriving, reinvesting dividends will benefit you more than taking the cash out.
Capital gains are another way to make money with stocks. Buy shares of a company, hold them, and eventually sell them for more than you paid originally.
The term “capital gains” means the profit made from selling an individual stock, or the difference between what you paid and what you sold it for. Not every stock will make money, but you can take steps to make it likely your gains will beat your losses.
4. A way to earn passive income
The stock market makes truly passive income a possibility. A savings account isn’t going to earn you enough interest to keep up with inflation, so you need to invest in something that will grow in value.
Aside from learning a little about wise stock investments, most people just need to buy and hold. Buy shares of stock, continue buying more shares, and let the stock price grow in value for years until ready to sell.
Your dividends can give you passive income while you’re still working and not yet retired. Then, in retirement, you can withdraw from your brokerage account by selling stocks systematically.
5. ETFs, index funds & mutual funds offer an easy entry point
For newer investors and those who don’t want to research a bunch of individual companies, index funds, mutual funds, or exchange-traded funds (ETFs) can be a means of keeping your investment risk low.
These types of funds hold shares of potentially hundreds of companies, meaning you can spread out your risk and avoid volatility. The more stocks owned within a fund, the better the chances that good returns will make up for any that bring losses. Funds are also a quick way to establish a diversified portfolio.
Besides helping lower risk, ETFs and index funds can simplify the investing process so you don’t need to dive deep into every single stock you buy.
6. Possible tax benefits
As an investor, you do have to pay taxes on capital gains and dividend income. The good news is, you pay a lower tax rate on them than you do for ordinary income. Holding stocks for at least one year means you’ll get that lower rate, so plan for the long-term.
Some investors even pay a 0% tax rate on capital gains if they’ve held the stock for more than one year.
The same tax treatment works for qualified dividends as well. Not every company that pays dividends fits this category, but if your dividend investments qualify, that can also save you money over time.
7. Diversification can lower risk & maximize returns
If you’re still not sure whether the stock market is for you, take heart. Investing in stocks doesn’t require a PhD in finance, but a bit of research and knowledge of how to keep your risk low.
Diversification minimises your risk in the market. This simply means owning shares in many companies and across several different sectors.
Rather than putting all of your money into one or two stocks, investing in multiple stocks helps protect your money. Think of it this way: owning only one stock leaves you vulnerable if that company goes under.
Owning shares of many different companies spreads out the risk, since it's unlikely that the share price of all of them will take a downturn at the same time.
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.” - Warren Buffett
8. Many different sectors to choose from
Stock market sectors are groups of stocks/companies that are in similar industries. There are 11 main sectors:
- Real Estate (Building projects or investment trusts, REITs)
- Industrials (Transport, aerospace, defence, construction)
- Energy (Oil, natural gas, coal, ethanols)
- Utilities (Electrical power, water, renewable energy)
- Healthcare (Pharmaceuticals, healthcare equipment and services)
- Materials (Chemicals, construction materials, mining stocks)
- Consumer discretionary (Automobiles, luxury goods, retail, hotels and restaurants
- Financials (Banks, insurance, brokerage houses, mortgages)
- Consumer Staples (Food, beverages, tobacco, supermarkets)
- Information Technology (Computer programmes, phones, TVs)
- Communication Services (Telecommunications, media, entertainment)
Pro tip: Choosing a stock sometimes requires a lot of research and due diligence. You can make this process more enjoyable by choosing a sector you already know well. For example, if you work with computers, pay attention to tech stocks.
Conclusion
When you invest in the stock market, you open yourself up to numerous benefits, like capital gains and dividends. Your money has the potential to grow in order to beat inflation, along with providing tax advantages. In spite of the risks, stock market investment is usually favorable in the long run and will help you reach your financial goals.
If you want to learn more about investing in stocks:
How to invest in stocks: A simple & clear 7-step beginner's guide
Did you know that if you have money in the bank, you’re already investing? Learn to invest that money for yourself, and you can make lots more in the long run!
With this simple beginner's guide, you’ll learn all the basics to start investing and build a solid understanding of the key concepts.
You’ll also be guided on:
- Deciding what stocks to invest in
- Knowing how much to invest
- Understanding how stocks work
- Selling at a profit
- Holding investments for the right amount of time
If you want to start investing but don’t have enough hours in the day to read the books listed here, read this article for a thorough rundown of the essentials.
Other ways to learn how to start investing include stock market simulators, investment apps and stock market courses.
If you know you want to invest in stocks, but don't know which stocks to invest in:
Opens is the investing app for busy people. Opens provides the same quality of information that the hedge funds use to make their investment decisions, but at a fraction of the price.
Features
- Receive a single stock recommendation every month, curated by industry experts, presented in a clear and focused one-page memo
- Access information akin to heavy institutional-grade reports, all in an easy to read and digest format
- Stay up-to-date and discover interesting opportunities with a wealth of investing shows hosted by Opens
Why Opens?
- Our internal strategy team is made up of sector-specific analysts – industry veterans with years of practical experience
- When the team identifies a sector for investment, our analysts get to work to identify the best stock to invest in that sector
- All the features and expertise you need to outperform the S&P 500
So, why not visit our website to learn more about Opens? Sign up for our service today – your investment portfolio will thank you!
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