Why Should You Invest In The Stock Market? The stock market can appear complicated and risky for those who haven’t experimented with buying and selling securities.
It’s tempting to avoid that risk altogether by parking money safely in a savings account or Certificate of Deposit (CD). After all, when it comes to traditional banking products, interest is reliable, and balances are insured for up to $250,000.
It’s true that your principal is safe in a standard FDIC-insured account, and you don’t run the risk of losing everything. The trouble is that the low interest rates paid on these accounts create another type of risk. Your purchasing power can’t possibly keep up with inflation.
In 2022, the national average for savings account interest is just 0.07 percent. CDs aren’t much better, paying an average of 0.25 percent to 0.50 percent. Meanwhile, in March 2022, inflation peaked at 8.5 percent. Long-term, the gap between savings account interest and inflation means serious problems when you need to use those funds.
Staying ahead of inflation is just the beginning when it comes to why you should invest in the stock market. These are three more reasons to explore additional opportunities to grow your wealth by investing in high-quality stocks.
Investing Can Be Simple
It’s easy to see why beginners find the stock market overly complex. Professional analysts and financial experts throw around acronyms, ratios, and unfamiliar terms when discussing market conditions.
However, it is possible to create a strong portfolio without learning about price-to-earnings ratios and operating margins. Simply choose a mix of well-known, reliable companies or go with an index fund that does the trading for you.
If your goal is to keep your risk low without spending hours on market research, consider blue-chip stocks – the ones that have a long history of producing steady returns for shareholders. Examples include:
Alternatively, an exchange-traded fund (ETF) that tracks the S&P 500, an index of 500 large US companies, costs almost nothing in terms of fees, and it gives you the opportunity to see your principal grow along with the market. Popular S&P 500 ETFs include:
You can buy these stocks and ETFs through most online brokerage firms.
Earn Extra Income From Stocks
There are two ways to earn money through buying and selling stocks. Everyone knows the first: buy low and sell high. When all goes well, companies become more valuable over time, so you can make a profit if you buy at today’s price and sell at a higher price in the future.
There is no guarantee that a stock’s value will appreciate over time, so this tends to be a trickier way to make money in the stock market.
Certainly, investors who bought into companies like Amazon, Apple, and Microsoft when they were small startups have made fortunes in the decades that followed. However, those stories are few and far between, and it is difficult to predict which companies will be winners long-term.
The second method of earning money through the stock market is a bit more reliable. You can choose companies that pay dividends to their shareholders. Basically, these companies take a portion of their profits and divide them among everyone who owns stock, so you get a payout that you can spend or reinvest.
Not every company pays dividends. In fact, companies that are still ramping up almost never pay dividends because they need that cash to fund their growth strategy. Established companies are more likely to pay dividends, which generally average between two and five percent.
If you want to focus on dividends, consider companies that are known for increasing their dividends year after year.
Companies that have increased their dividends every year for 25 or more consecutive years are known as Dividend Aristocrats. While these companies aren’t obligated to continue increasing their dividends indefinitely, Dividend Aristocrat status is prestigious, and there is a lot of pressure to stay on the list.
Some of the Dividend Aristocrats include:
AbbVie – 50 years of dividend increases, current yield of 4.5 percent
Chevron – 35 years of dividend increases, current yield of 4.1 percent
IBM – 26 years of dividend increases, current yield of 4.8 percent
Kimberly-Clark – 49 years of dividend increases, current yield of 3.5 percent
Realty Income Corp – 27 years of dividend increases, current yield of 4.4 percent
If you don’t want to choose between dividend-paying companies, there are ETFs that give you exposure to the entire list of Dividend Aristocrats – for example, the ProShares S&P 500 Dividend Aristocrats ETF. You can also buy shares in an ETF that focuses on maximizing your dividend income. Options include:
iShares Core Dividend Growth ETF
Schwab U.S. Dividend ETF
SPDR S&P 500 High Dividend ETF
Vanguard Dividend Appreciation ETF
Vanguard High Dividend ETF
Remember, you don’t have to hire a pricey investment advisor to put some of your money into dividend stocks and ETFs. Online brokerage firms make the process simple, and most offer free trades with no minimum balance requirement.
How To Reach Your Financial Goals
It’s true that the stock market is unpredictable, and many people have lost money with bad investments. However, you don’t have to be one of them.
You can invest in the stock market and build your wealth without taking on excessive risk. Buying stock in dependable companies that have been around for decades isn’t a guarantee of returns, but it is no riskier than keeping cash in a savings account and watching your purchasing power diminish due to inflation.
High-risk behaviors are easy to avoid. These are the behaviors that make it possible to lose everything with a single bad trade. For example, some people use a day trading technique, which involves making big bets on small movements in the market. They buy and sell stock many times per day, and if they don’t time their bets just right, they will see losses. Investors who buy and hold quality stock long-term don’t run into this issue.
Another example of risky behavior is buying stock on margin – in other words, taking out a loan from the brokerage firm to purchase shares. Anytime credit is introduced to an investment, the level of risk goes up. If you pass on this type of purchase, you can avoid significant risk.
Certain types of options are hazardous indeed – they involve virtually unlimited risk potential, and inexperienced traders can find themselves in hot water quickly. Best to pass on selling options contracts until you have a deep understanding of the various options strategies – and even then, proceed with caution.
If you are in the market for the long haul, you don’t have to worry about economic ups and downs. Sometimes, your portfolio will experience losses. Sometimes, you will see gains. Either way, don’t panic. The stock market has historically always recovered, no matter how badly it has crashed. If you have created a solid portfolio, you can rest assured that sooner or later, you will see returns.
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