Nowadays, you can often hear that investing in the stock market is the next big thing and that the younger you do so, the better. However, most people tend to be sceptical and are wary of stocks investing, due to it being risky and time-consuming. As a result, stock investing tends to be put on the backseat and forgotten about. That being said, most investment experts still advise people to diversify their financial portfolios beyond simple bank deposits, mutual funds, and precious metals like gold.
The good news is that with the proliferation of technology, investing in stocks has become more accessible and easier over the years. In fact, you can open a stock trading account right via your mobile phone. No longer do you need to get in touch with a broker in-person, as everything can be done online. As such, most experts would agree this is a fantastic time to start investing in the stock market.
Let us explore some of the main reasons why people should start investing in the stock market today:
What are stocks
Before we talk about why you should start investing in stocks, you first have to understand how stocks work. Simply speaking, a stock represents a fraction of ownership of the issuing corporation. Companies usually issue stocks to help them raise funds to operate their businesses. In return, a shareholder is considered an owner of the issuing company and can have a claim on the company’s earnings and assets.
Stocks are predominantly bought and sold on the stock exchange, such as the Nasdaq or the New York Stock Exchange (NYSE). To do so, most investors need to open a brokerage account to start buying and selling stocks. The price of a stock is easily impacted by its supply and demand in the market, as well as other factors.
Generally speaking, there are two main kinds of stock, the common and preferred. Common stock allows its owners to vote in shareholder meetings and to earn any dividends that are paid out by the corporation. On the other hand, preferred stocks do now allow shareholders to have voting rights. However, they are allowed to have a higher claim on assets and earnings instead. For instance, those who own preferred stocks can receive dividends before common shareholders. Plus, they have a higher priority if a company ends up going bankrupt and is liquidated.
Beat inflation
One major reason why people should start investing – especially in stocks – is to financially secure their own future. However, a factor that can severely impact someone’s finances in the future is the inflation rate, which is rising. However, it is important to note that if the inflation rate is the same as an investment’s rate of return, then they will cancel each other out, leaving the investor with nothing. As such, an investment’s rate of return should be higher than the inflation rate. Fortunately, most stock market investments tend to stay higher than the rate of inflation. For instance, if the inflation rate is 3-4% a stock market gain can be around 10%, depending on the type of stock and investment you choose.
Gain higher liquidity
Stocks are considered liquid assets. This means that a stock can be easily converted into cash since there are many buyers in the market at any given time. Sadly, this is not true for all financial instruments and assets, as it can sometimes be difficult for investors to buy and sell certain assets, such as property, for instance. In fact, it can take a few months to even years before investors can generate capital from their property investments. Fortunately, liquidating stock investments is far easier in comparison.
Gain ownership in a company
If you invest in a stock, you essentially invest in the performance of a particular company. This is because, as stated earlier, stocks represent an ownership stake in the company. As such, shareholders can influence a company’s decisions, as they can vote for or against any major decisions. This is especially useful if a shareholder is looking to bolster their own interests regarding the company. Additionally, every shareholder is given an annual report which tells them how the company is doing and its overall growth achievement.
Do not need to be an expert
While the stock market may seem complicated at first glance, the truth is that it is one of the most accessible and easiest-to-learn financial instruments out there. Technically speaking, anyone can invest in stocks – there is no need for an economics or finance degree. So long as you are willing to educate yourself and learn how to read certain charts, then that should be enough for investing in stocks. There are also plenty of videos, tutorials and tools to help novice investors get started. For instance, before diving in with real money, you can use demo accounts and simulators so you get a feel of how trading would go. You can also follow podcasts and commentaries from financial experts to understand which stocks are worth investing in. Even if you are not an expert, stock investing has a very low barrier to entry.
Easy to diversify
When you choose to invest in stocks, it is easy to diversify them. This means you are not putting all your eggs in one basket. For instance, if a particular stock is not doing well, other stocks that you have invested in may be able to make up for it. Diversification, in particular, is a way to mitigate risk. Unlike certain assets such as art or real estate and property, it is easy to pick a variety of stocks from different regions and sectors. This means you can protect your portfolio from volatility in the market, especially if the market ends up fluctuating.
As stocks are also influenced by current events, diversifying them helps to protect your overall investments. For instance, if a certain sector – like the airline sector – is not doing well, you can counterbalance the drop in stock prices with other stocks from different sectors. This makes your portfolio more balanced and risk-averse.
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