Even though the number of small investors in the international stock markets has risen significantly in recent years, many people are still reluctant to invest their money in stocks. In particular, the retirement planning of younger people often still resembles that of their parents and grandparents. Increasingly, very conservative and safe, but low-yielding options such as bonds and money market funds continue to be chosen. Therefore, in this article, we address the question, „Why buy stocks?“
Buying stocks can provide a way to save money without high maintenance compared to other asset classes. By diversifying, the risk of this investment method can be minimized. Even with small deposits, investors can build a fortune in the long term in this way.
Nowadays it is almost impossible not to hear about stocks or ETFs – at least marginally. After all, these topics are more and more often spread in the social media. It seems that interest in the stock markets is also increasing among the younger audience.
On the other hand, some experts believe that some factors, such as the severe stock market crashes of 2007 – 2009, have lowered people’s willingness to take risks (especially in younger age groups). However, it can be advantageous to invest in stocks or ETFs at a young age and save in this way.
Table of contents
1. Buying stocks is more affordable than you think
Investing in stocks is a great option to make your money work for you. And you don’t even have to have thousands of dollars saved up to start. Even small savings are enough to start investing. For example, save the money for your daily latte and invest it in stocks or an index fund. This can be almost painless, but over a period of time, have a big effect.
One of the most common investment vehicles for new investors is a dividend reinvestment plan (DRIP). DRIPs are stocks that automatically reinvest all distributions by buying more stocks. In doing so, you also save yourself extra money since there are no brokerage fees added for transactions. This is because the stocks are bought back directly from the company offering the stocks.
Over a longer period of time, your stock portfolio and your earnings grow – at an accelerated rate – due to the interest effect.
2. You don't have to be a genius to buy stocks
Of course, experienced investors have an advantage over beginners. However, you don’t have to be wealthy or a math genius to buy stocks. The first rule is to look for stocks that you know are in industries that interest you. This interest will help you stay informed about investments and do your research.
You don’t have to be a genius to buy stocks
And here we are on to the next point. Do your research before you buy stocks. This also means reading annual reports from the companies in question. If you do this, you can minimize the risk of buying stocks.
To get a general overview, but also to search for specific stocks and get constant updates, websites like MSN Stock Screener are recommended.
3. Stocks have historically only risen
Over the last 100 years, stocks have tended to only go up. Of course, there have been stock market crashes, setbacks, and periods of poor performance, but by and large it shows a steady march upward. A good example is the S&P 500, a group of the world’s 500 large companies.
Despite some ups and downs, this chart quickly shows that if you had invested in the S&P 500 30 years ago, you would have made a lot of money.
To exaggerate the point: If you had invested just a single dollar in small-cap stocks in 1926, that dollar would have become $40000 today.
4. Buy stocks to escape inflation
Inflation is the decreasing purchasing power of a currency over time. It is definitely not your friend if you want to save for a major purchase, like a house or a comfortable retirement. In the United States, the inflation rate has averaged 2.46% over the past 10 years. Now think about whether the annual interest on your bank account significantly offsets that rate.
Counteract inflation by buying stocks:
In contrast, if you had put your money in the MSCI World Index 10 years ago, you would have significantly countered the effect of inflation on your money. This is because the average return of the MSCI World Index (over the last 10 years) is 8.09%.
5. Buy stocks for retirement
If you start investing small amounts of money at a young age, you can build up really comfortable assets for your retirement. On the one hand, tax-free retirement accounts help, but also regular payments from your income.
Retirement planning by buying stocks
So if you want to stop working at some point and don’t necessarily trust that your state pension will be taken care of, buying stocks can be a great way to save for retirement.
6. Investing in stocks to diversify
Buying stocks allows you to diversify how your money is invested and decide how to generate income for you and your family. What does „diversify“ mean? It means the more ways you have to make your money, the less risk you have of getting into financial trouble if one of the methods fails.
For example, you have a steady job, earn extra money on weekends doing crafts, and you’ve also invested in some dividend stocks. Now, if one of these sources of income were to dry up, you could get through the difficult period first by using your income variety.
The same is true with investing. Owning stocks (if diversified) can diversify the return on your money.
7. Stocks are a flexible investment
If a company of which you own a stocks no longer has a business model that matches your goals, you can quickly sell those stocks and find another company. A company that meets your needs. On the other hand, you can also take your money (the pro-rata stock value at the time) right back in cash.
This is different with physical companies or real estate. On these you can be stuck for months or even years until a buyer is found. In the stock market, however, there are almost always buyers waiting to buy stocks.
8. Stocks can be low maintenance
Stocks can require little work. Investors who invest for the long term have less to worry about in terms of maintenance than is the case with other asset classes. That’s because with physical businesses or real estate, you may have to manage employees and make repairs.
High-quality stock investments, on the other hand, if purchased correctly, can be left alone even for years. Plus, they can be just as profitable as if you controlled them on a daily basis.
Conclusion
Although the number of small investors in the stock markets has increased significantly, people still tend to use more conservative investment methods to build up their wealth. However, even without a large amount of start-up capital and initial know-how, buying stocks can provide good returns with relatively low risk.
In this article we have given you some reasons why buying stocks simply makes sense. If you now also want to start investing don’t forget the tips we gave you regarding research.
You can find more articles about stocks and finance on FinancialHypes.
