It's natural for us to be averse to risks, especially when it comes to our hard earned money. You've probably heard people claim how they lost all their money investing in stocks, further confirming your hesitation to start investing.
“Why should I invest in the stock market if I could loose my money?”… a great question, but also a flawed question based on claims backed by improper investing strategies in the first place. To illustrate this point, consider the following reasons on why you should invest in the stock market, and how to properly approach investing so that you benefit financially from it's limitless returns.
10 Reasons To Invest In The Stock Market
Aside from the fact that the stock market has provided the greatest overall investment return since the beginning of time (just ask Investopedia.com), here are 10 reasons that you need to be investing in the stock market:
1. Compound Interest
Compound interest is often referred to as the “8th Wonder of the World,” and for good reason. Compound interest is when you receive interest upon interest from your investments. In other words, your investments grow on an exponential basis.
If you invest $1,000 in year one and achieve a 10% return, your return will be $100 for the year, and your balance at the end of year one will be $1,100. If you receive 10% return again in year two, your return will be $110 for the year instead of $100. This concept is called compound interest, and over time can make you a very wealthy person.
To further illustrate the concept, here's a surprising example:
Question: How much money will you have at the end of 31 days if you start with $0.01 on day one, and double your money each day?
Answer: You will have $10,737,418.2 on day 31.
Don't believe me? Pull out your calculator, type in $0.01 then press “x 2” 30 times. That's the power of compound interest!
2. Build Wealth
Some of the wealthiest individuals in the world got to where they are from investing in the stock market. Take Warren Buffett for example. His wealth journey began as a hedge fund manager, followed by years of building a powerful investment portfolio comprised of some of the worlds most well known companies today.
Learning the basics of investing in the stock market, and knowing what key indicators to look for in potentially great companies can turn a small investment of a few thousand bucks into a wealthy lump sum.
If you don't invest in the stock market, you risk loosing value in your money due to inflation. Inflation is simply the term used to describe the ever increasing prices in products and services, and as a result, the value of money declines over time. A $2.99 candy bar may easily have cost just $0.25 years ago, this is due to inflation.
Investing in the stock market allows you hedge against the risk of losing value due to inflation. In other words, if you're not investing in the stock market, you're loosing an average of 2% – 3% of your money each year from inflation.
4. Save For Retirement
Ever wondered how much money you need to save in order to retire comfortably? Here's an easy formula to follow:
- Determine the annual income you wish to live on when you retire. For this example we'll say $50,000 per year.
- Determine what age you plan to retire and how many years you have until you reach that age. We'll assume you retire at 65 and are currently 30 years old for this example. This means you have 35 years until you plan to retire.
- Calculate $50,000 plus inflation each year to determine how much $50,000 will equal 35 years from now. Go to Calculator.net and click on “financial calculator” to calculate $50,000 with a 2% inflation each year for 35 years. The answer is $99,994.48. In other words, $99,994.48 35 years from now will be worth the same as $50,000 is worth today.
- Take the answer from step 3 and multiply it by 25. The equation looks like this: $99,994.48 x 25 = $2,499,862. This assumes you will withdraw 4% of your savings each year for retirement to live on.
Long story short, if you want to live on a $50,000 year income and you retire in 35 years from today, you will need to save up $2,499,862 in order to retire on your desired income.
Do you think you can save that amount of money in a savings account? Absolutely not! (Unless you have an above average income, obviously).
5. Passive Income
Perhaps the most true form of passive income is investing in the stock market. Why? Passive income implies that your money makes money for you without having to hardly work to maintain it.
Most forms of passive income require moderate amount of work to maintain your investment in order for it to keep earning money. However, investing in the stock market takes little maintenance at all to stay posted on how your investments are doing.
You've heard the term “don't put all your eggs in one basket…”. It means to spread out your risk, so if one risk fails your other risks will make up for the loss. This also applies to building wealth and investing in general. If you're heavily invested in real estate, bonds, your small business, etc. consider the diversification the stock market provides for your portfolio!
There are thousands of publicly traded companies on the stock market, in hundreds of different industries, all of which provide a plethora of opportunities to diversify your investments.
7. Own Your Favorite Companies
Think of the top 3-5 companies that provide a product or service that you use on a daily basis. For example, some of mine might include Apple, Amazon, Netflix, Roku, and Spotify (among many others). Each of these companies I absolutely love, and in fact own shares of each of these company's stock. Not only do I benefit from their awesome products and services, but I also benefit from the monetary growth and success they are having! This makes investing in the stock market even more exciting!
8. Multiple Investment Options
In the US alone, there are approximately 3,000 – 5,000 publicly traded companies listed on the NYSE and the NASDAQ markets, with hundreds of new Initial Public Offerings (IPO's) each year of newly listed companies. This provides a great opportunity to get in on the growth of some of the fastest growing companies in the world. Imagine having invested in Amazon or Apple in the early days of being listed on a US exchange!
9. Low Cost Investment Options
It used to be that investing in the stock market had a costly fee to get started. With discount brokerages and modern investment apps such as Robinhood offering commission free trades, you no longer have to worry about the cost to getting in. Larger companies such as Fidelity and TD Ameritrade now offer commission free trades as well.
10. It's Not Rocket Science To Get Started
Invest in companies and industries you know and understand, that have high amounts of cash relative to debt, with a strong trend of growing sales, a visionary executive leadership team and a large market opportunity – and you've got some promising companies to add to your portfolio! It's truly not rocket science and is as simple as a basic checklist like this to make logical investment decisions.
11. Bonus: Some Companies Will Pay You To Invest!
You can start investing in the stock market with as little as just $5 with some of the modern investment companies today. In fact, companies such as Acorns, Stash, Robinhood and others will even pay you a bonus just to get started investing with them!