Nowadays, the up and down movement of stock prices is oftentimes catching lots of attention from news and media reports. Nearly everyone already knows of the possible option to invest their money in the stock market. However, many people might still not be fully aware of the benefits that investing in stocks provides.
Investing in stocks is often considered as risky. What you might know of are the significant gains and losses, which can be made at the stock market. But in reality, stock investing doesn’t have to be a complicated game involving complex numbers where you could lose everything at any time if you aren’t cautious enough. Investing in stocks should rather be seen as a great long term way to massively compound your wealth, instead of any short term trading where you can lose money just as quickly as making fast money.
In the following, we are going to quickly walk you through some of the primary benefits that stock investing provides.
Stocks Yield Great Returns
Companies have always been growing over the long term in accordance with rising productivity, and the stock market will most certainly continue to provide positive returns throughout time.
The S&P 500, a collection of 500 large-cap companies from the United States, has an average annual return of about 10% since 1926. The performance of this index shows that stocks are one of the best performing asset classes to invest in.
That is a return which no other savings account can achieve nowadays. However, you shouldn’t really expect each year to earn exactly 10% on your stock investments. The stock market does fluctuate a lot and even annual returns can vary from about negative 47% to positive annual gains of 47%. Of course, your overall performance is heavily going to depend on which stocks you invest. But if you just want to passively invest in the whole stock market, buying index funds or ETFs may be the best possible choice for you. With that, you can expect an average annual return of about 8% over the long term.
Here is a chart of the annual performance of the S&P 500 throughout history:
It can be very beneficial to invest in stocks at certain times to maximize potential gains. If for example, someone had bought stocks when they were cheap right after the stock market crash of 2008, they would have made an enormous return if sold today. To have a better perception of when to buy and sell stocks, you would need to have an understanding of economic cycles.
Additionally, success in stock investing requires solid control over your emotions and feelings. Many investors make the mistake of buying at the top and selling at the bottom. The lack of clarity and understanding about how things work leads many people to let their emotions take over, and therefore, act on sudden events in a completely opposite way of how they are supposed to.
If someone is willing to put lots of time and effort into stocks to learn how to manage their own portfolio and start investing actively, then there is the potential to achieve even higher returns than the market as some successful investors like Warren Buffett or Peter Lynch have been able to prove many times.
Stocks Provide Additional Diversification
Stocks and equities are a part of most investor’s portfolios, and they can add to proper diversification as their performance doesn’t correlate directly with other conventional asset classes like bonds, commodities or REITs. By holding stocks, you can potentially make up for a loss when other investments are performing poorly.
Nonetheless, because stocks do provide a higher return in general, they are generally riskier than many other asset classes, which is why most people should only have a part of their diversified portfolio invested in the stock market instead of being entirely dependent on one single asset class.
Also, stock investing doesn’t have to be exclusively in the U.S. stock market. There is also the option to diversify into international stocks to reduce the risk of a severe decline in your portfolio and smooth out returns even further.
Stocks are easy to buy and sell
On each trading day, shares of stock are constantly switching owners countless amounts of times. Investors are continually buying and selling their shares, and the price of stock changes with every executed trade. That is why most stocks are considered highly liquid investments. Investors can buy whenever they view the current price as appropriate, and they can cash out whenever they want because it is mostly quick and easy to find a buyer on the other side who is willing to pay for the current market price.
Examples for non-liquid assets are land and real estate as it can take months to find a suitable buyer, which makes it more difficult for investors to turn those kinds of assets into cash whenever they need it.
Prices of non-liquid assets can also be much more volatile. Investors don’t have liquidity problems with stocks since those can be turned into cash relatively quickly when needed.
Everyone Can Invest in Stocks
Technical development has made investing more accessible than ever before. Nowadays, most stock trades are all executed through electronic platforms, which makes it possible for investors to manage their shares with only a few clicks online. People who want to buy and sell stock can easily do that through a stockbroker.
Some stockbrokers don’t even charge any fees for each transaction anymore. Nearly everyone who has a bank account can open a brokerage account and start buying ownership in tens of thousands of listed companies worldwide. This makes stocks one of the more easily accessible assets, additionally providing lots of potential to creating massive wealth for investors.