Why You Should Consider Investing in the Stock Market
If you look at anyone mildly successful, they may have a good job with a good salary but that is usually not the main reason they are wealthy. What separates them from being poor or average is that they either own a business or invested in real estate assets. Luck, effort, and skills are part of the equation but the vehicle of wealth these successful people get on, are the same.
Owning a business or acquiring real estate property can be a daunting tasks. So how can the common person begin the path of wealth if they neither have a business or own real estate?
The answer: investing in the Stock Market.
The stock market is the market where publicly held companies are traded and issued through exchanges. It’s a place where companies can have access to capital in exchange for giving investors an ownership interest of the company. For small individual investors, the stock market provides an opportunity to invest a small seed of money and potentially become wealthy without taking the risk of starting or running a business.
What are stocks?
A stock is a unit of ownership in a company. Stock represent claims on a company’s earnings or assets. You can own 1 or multitudes of stocks within a company. Each stock has a value price which you can pay for at the time of purchase. You buy stocks from another trader or owner. Other common stock terms are equity and shares. Buying a stock in a company makes you a shareholder of that company. As a shareholder, you may have rights for the company such as voting rights and can receive dividends, a portion of profits of the company paid out to its shareholders. Thus, public companies can have thousands of shareholder or owners (however the amount of stocks you have may be insignificant and thus cannot affect the direction of the company).
Learn more about stocks from Investopedia.
How Average People Invest
In our observation, most people are not proactive investors. In majority of cases, people start investing when they get a job which provides a 401(k) plan. A 401(k) plan is a savings retirement plan set up by an employer for the benefit of their employees, to make contributions from a portion of your salary on a post-tax or pre-tax amount into an account to kept for your retirement. Employers can choose to match your contribution or add profit-sharing to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis or tax-free. This means that capital gains and dividends earned can grow tax-free or tax-deferred. Over a period of many years, an employee’s retirement account can grow to a significant amount.
“The best time to plant a tree was 20 years ago. The second best time is now.” — Chinese Proverb
What Should You Do?
How should the average person gain wealth if he/she does not have a business or own real estate? We believe investing in the stock market is one of the easiest and fastest way for the common person to create long-term wealth over a period of time.
The advantage of investing in the stock market as opposed to owning a business directly, is not having to deal with the everyday operations of running a business. Making sales, managing employees, inventory, customer management, and dealing with legal issues can be a daunting task. When we invest in the stock market, we are indirectly owning publicly traded companies that already have a management team in place. So, we as individual investors, have free time to hold another job or pursue other interests.
Let’s imagine what could happen if you decide to buy a business:
You buy a coffee shop. There is a learning curve and as you make mistakes; location is not good enough, the business potential is not there, employee problems, product issues etc. Your only way out is to sell the business (often at a loss). It’s also expensive to sell a business. You need to hire an agent, pay fees and negotiate on the price while still paying rent to the landlord. The biggest consideration of owning a business is that you have to be there to run the business. There is a time commitment to managing the business which leaves little to do anything else. And if the business isn’t making money, you are not getting a salary.
Now if you buy a publicly traded company but realize you do not agree with the fundamentals of the company and its vision. The cost to correct the mistake is minimal (you sell your shares right away).
There are overwhelming evidence that investing in a well diversified portfolio of stocks has proven to be a great way to build long-term wealth. Historically, returns on investment from the stock market has been very generous (9–10%). On average, stocks have doubled every 7–8 years (with dividend reinvested). Over a long period of time, if you continue to invest and contribute to the stock market, you will probably have a decent nest egg. (you can view historic returns on investment from NYU.)
The market doesn’t go up every year. These are average returns. Past performance is no guarantee of future results. But if you build a well diversified and low-cost portfolio of high quality companies, there is a good probably for decent return.
Let’s say you invest $10,000 into the stock market at 25 years old. You could potentially double your money every 7.5 years. By the time you are 70 years old and assuming you make no more contribution; you could potential have $640,000 in your account. Now Imagine if you contributed more over your lifetime. Your money made money for you.
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” — Robert Kiyosaki.
Investing can be fun and rewarding. Our next post will help you get started on opening a brokerage account. Subscribe to our blog or our publication to learn how to invest smartly and properly. We aim to make investing simple and fun. Join us along the way.
Originally published at investingbrothers.com.