You might have some savings or come across a windfall then a thought pops up in your head—“I do not have an immediate need for this money. Perhaps I can make this grow. Maybe I can invest it for my retirement or earn something in the future.”
Investing in stocks is one area you can consider, and this article will show you the compelling reasons to do so.
Just the Nuggets
- Stocks are assets that represent your ownership in a company.
- The S&P 500 Index reveals more than 9% average return of the stock market compared to returns from investments in other asset classes.
- Investing in the stock market is straightforward and easy to do.
What are Stocks?
Stocks represent units of ownership in issuing companies. When you purchase a stock of a specific company, you own a piece of that company. Investing in one of the best-performing stocks allows you to share in that company’s growth and profits. Additionally, it is worthwhile to note that the terms stocks and shares are used interchangeably.
Comparison of Historical Returns
Based on Goldman Sachs data, the average 10-year return of the stock market stands at 9.2%. However, rates vary from year to year and stock values tend to increase quickly.
You can earn from your real estate investments by selling your property at a value higher than your cost of acquiring it (capital gains). The median sales price of houses sold for the US has steadily increased over the years.
The median price in the first quarter of 2010 was at $222,900. It is now at $313,200 in the second quarter of 2020. However, appropriate fees and taxes are deducted from the sales proceeds. Thus, investing in real estate may involve higher transaction costs.
Another way for you to earn is through renting out your property. The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI) 10-year return stands at an average of 8.5%. This includes properties held and owned for investment purposes only.
Cash and Cash Equivalents
Certificates of Deposit (CD) is a type of savings account but with a much higher and fixed interest rate. A six-month CD yielded 0.49% in January 2010 compared to 0.28% in April 2020. On the other hand, a one-year CD yielded 0.78% and 0.46% while a five-year CD yielded 2.05% and 0.69% for the same period.
Treasury Bills (T-Bills) 10-year yield rate was 2.59% in October 2010 and 0.72% in August 2020.
The US Treasury data revealed that the long-term 10-year bond composite rate was 4.42% at the beginning of January 2010 compared to 1.25% at the start of September 2020.
9 Powerful Reasons
Investing in stocks is a direct and straightforward process, making it easy to understand especially for newbie investors. You can purchase stocks from the stock market through a broker (face-to-face) or legitimate online service providers like TD Ameritrade and Betterment.
Competitive and stable advantages
Most, if not all people, aim to build wealth. Investing in stocks of well-chosen companies offering competitive, stable, and well-established advantages allows you to have a comfortable life in the future. Through this, you can build your wealth slowly over time. Accordingly, you can make improvements to your lifestyle proportionate to your net worth.
Imagine yourself investing $10,000 in a company, making you purchase a thousand shares. The average annual dividend paid out for each share is 5% for the next five years. It means you will receive a total dividend of $2,500. If you decided to reinvest the dividends to buy more shares from the same company or other high-performing ones, then your dividend earnings for the same period will also exponentially grow. This is called compounding.
Support for your family’s needs
Your goal might be to accumulate enough money to buy a house or send your children to college and other classes in between.
Build a nest egg
Investing in stocks allows you to prepare a nest egg so you do not have to work, formally at least, until you are 65. When planned properly, stock investments allow you to have a smooth transition from working long and hard into an easy and stress-free retirement, where you won’t have to worry about how you can sustain yourself. It can even allow you to retire early and enjoy life more.
You can receive regular dividends for the stock investments you make. These provide you with another source of cash flow in addition to your salary or business profits. Dividend rates usually vary from 1 to 10 percent. Dividends are usually paid out quarterly after the financial reports are prepared.
For example, you’ve just retired and decided to purchase 1,000 shares of Apple, Inc. in January 2019 at $154 per share. For 2019, the total dividend per share paid out by Apple, Inc. amounted to $3.04. So the total dividend you received in 2019 reached $3,040 or a return of almost 2%.
Stock prices are going up
The prices of stocks have gone up historically. One way to measure the price movements is by looking at the stock market index or the stock index. Three of the major stock indices you can look at are the Standard & Poor 500 (S&P 500), NASDAQ Composite, and Dow Jones Industrial Average.
Let’s take a look at the S&P 500, for example. It tracks and measures the performance of the top 500 traded companies representing different sectors and industries.
From a price of $1,358.03 in September 2010, the price of S&P is already $3,500.31 in August 2020.
With inflation, the money you have now will not have the same value in the future. Inflation is the rate of increase in the prices of goods and services you usually use like food, shelter, clothing, among others. As a result, the value of your money diminishes and its purchasing power—the ability to buy these same goods and services—is reduced.
Investing in well-chosen stocks allows you to earn while covering the shortfall caused by inflation.
For example, you invested $10,000 in a company’s stocks in January 2015, which gives you a 3% dividend per share annually. For the 2015-2019 period, your stock investment gave you a total return of 15%.
On the other hand, if you decided to just hold onto your cash, its value eroded at a rate between 0.1 and 2.4% for the same period.
Easy to convert to cash
Stocks are liquid, meaning you can easily convert them to cash. If the need arises for an emergency, business, or personal use, just make a few clicks and you can already convert your stock holdings into cash.
Earn when you sell stocks
When you sell stocks, what you can earn will be the price difference between the share or par value at the time of purchase and the time when you sell the stocks (capital gains). But even if the latter is lower than the purchase price, you will still stand to gain if you add up the total dividend earnings you may have received over time.
How to Reduce Investment Risk
Check out the investment’s or issuer’s history, management and company profile, debts, earnings, and growth trends. It is also important to check their price-to-earnings (P/E) ratio, which is a measurement of their stock price against the year’s after-tax or net earnings.
2. Consider making regular investments
Instead of putting in one big amount at one time in the stock market, examine the possibility of making regular investments over a specific period. You can then purchase more stocks at the time prices are low.
Portfolio diversification means that you include stocks from not just a single company or issuer but also multiple issuers from different sectors or industries.
4. Go global
Invest in stocks from across the globe with different dynamics. Instead of focusing on location or region-specific stocks, investing in players from emerging economies and sectors will help you gain more exposure.
Selling stocks with a decreasing market value compared to the par value or purchase price is one way of reducing risks. This is also a good way to offset the benefits and gains from other stock investments come tax season.
Investing in stocks is a way for you to be financially independent and prepare for your retirement. It has consistently shown increasing returns, and you can easily invest with just a few clicks on your computer. While the process may be straightforward, investing in stocks also allows you to easily and quickly convert your stock holdings into cash if so needed.
Our References and Further Readings