Why to invest in stocks? In this post I have 6 reasons you should own stocks. Investing in general has a lot of benefits. It can be fun while making you money. Let’s dive right into it.
1. Good way to defend yourself against inflation
The first reason you should own stocks is that it protects you against inflation. Inflation means your money will lose its purchasing power, or even simpler, prices will increase. If you one year ago could buy a pizza for 5 dollars, this year it might be 6 dollars.
When you have your money invested, for example, in stocks, your wealth will grow, and your assets will maintain and even grow the purchasing power they had.
Let’s say one year ago you could buy that pizza for 5 dollars. Instead, you invested those 5 dollars, and your position grew to 7 dollars. Now you could sell the stocks you bought, buy the pizza, and have some money left over, even after inflation reduced the purchasing power of money.
Regular currencies, especially nowadays when a lot of “new money” is being printed out, do not maintain its value really well. Inflation so far in 2022 has been somewhere around 7% in the eurozone and the US by the time of writing.
This is why buying stocks is one of the ways you can protect yourself against inflation and keep the purchasing power you have worked for.
2. Creates long-term wealth
Buying and owning stocks is a good way to create long-term wealth. The sooner you start investing, the more time compound interest has to do its job. If you are not familiar with compound interest, I just wrote a post about a dividend snowball. That might not mean a lot to you, but if you want to know more, you can read the post here.
So, the reason you might be buying stocks is that you want to have a bit more money when you retire. Investing in stocks is a good way to build that wealth over time. Investing a part of your income regularly is a very passive way to build wealth for the future.
The compound interest works pretty much like this: your initial capital will grow interest and after that, your initial capital and the interest will grow interest. Example below.
You invest 1000 dollars with a 10% annual return. The next year your portfolio has grown to 1100 dollars. After the second year, you will have interest for your initial 1000 dollars and the 100 dollars it grew interest. This puts your portfolio at 1210 dollars, instead of 1200 dollars. The impact doesn’t seem so high yet, but over a period of decades, the impact of compounding is huge.
3. Investing is stocks has a low barrier of entry
The third reason you should own stocks is that it is a very easy and passive way to invest. The barrier of entry is low. You only have to open an account and have some savings you can put away for quite some time.
Compared, for example, to real estate investing, you will have to physically own the property, do much more paperwork, and find a tenant before it starts to make you money. In stocks, a few clicks online and you are all set.
Even that buying and owning stocks has a really low barrier of entry, it can be very difficult to find the individual stocks that are going to perform better than markets overall. If you want to pick the lowest hanging fruit here and not think so much about it, a good index fund might be a good place to start.
Index funds are investing instruments, that are already well diversified. For example, S&P 500 index fund owns stocks of 500 different companies. By buying the index fund, you will own smaller pieces of 500 different companies.
There are differences between funds as well. I have a post comparing active funds with passive index funds and how the fees affect your returns over time. You can read it here.
4. Stocks are a way to diversify your portfolio
You might already have some investments, such as real estate, cryptos or perhaps a gold coin. Stocks are another way to invest and can be a good way to diversify your portfolio with a low barrier of entry.
There are no rules that you should diversify some of your assets to stocks, but there are benefits to all of the different ways of investing. Stocks bring in the low barrier of entry, and if you happen to need the money for something urgent, it is much faster to liquidate stocks than it is to sell real estate.
There are also a lot of ways to diversify your portfolio within just the stock market. It is mostly about personal preference and life situation, whether you buy just stocks or also different investing instruments.
Real estate investing can be very time consuming, but it allows for somewhat safer usage of leverage in your investing. Cryptos, on the other hand, are very volatile and, in my opinion, should not be the main instrument in your portfolio.
5. Investing in stocks can be fun and rewarding
Investing can be treated as a hobby, or you can build your career around it as well. Let’s start with investing as a hobby first. There are not so many hobbies out there, that offer a positive return on investment. I have a post about investing as a hobby. You can read it here.
Let’s take snowboarding as an example. You are buying hundreds of dollars’ worth of snowboarding gear; it most likely is not going to pay itself back unless you happen to win the Olympics or something.
However, if you buy hundreds of dollars’ worth of stocks or index funds, you might expect positive returns based on past data. With 8% annual return, if you were to invest 1000 dollars, that would grow to around 2150 dollars in 10 years. Not many hobbies can do the same with so little effort as clicking a few times on your computer and doing some basic research.
It can also be very rewarding to find and buy new stocks. There is always something new to learn and new companies are listed every year. Trying to find the best companies can be very rewarding if you succeed. It can also be very difficult, because picking the best performing stocks over and over again can make you a fortune if you play your cards right.
6. You can start with very little money
The sixth reason you should get into stock investing is that you can start with very little money. Unlike real estate investing or snowboarding, you don’t need thousands and thousands of dollars to get started.
You can test the waters easily with 100 dollars or even less. I have a post on how to invest 100 dollars. You can read it here if interested.
There are a lot of ways you can start investing with 100 dollars, and that might be index funds, stocks, fractional shares, cryptos, or all of those. Find the best way that fits your personal preferences to invest.
Final words and things to keep in mind when investing in stocks
If this post lightens the spark inside you and encourages you to learn more about investing, there are still a few things to keep in mind.
Past returns are not a guarantee of future returns. This means that even if the stock markets have provided us with 8% annual inflation-adjusted returns in the past, this doesn’t mean it will continue in the future.
However, companies are supposed to make profits for their shareholders, so if one can not do it, there will be another to replace it.
Another thing to keep in mind is that if you decide to buy individual stocks, diversify. Don’t put all your money into a single stock. Buy several different stocks. Maybe 10 different stocks on a few different industries. This way you will reduce the risk of a single company or industry taking a big hit and damaging your portfolio.
Other investing-related posts can be found here.
That’s about it, hopefully this was helpful to you. Have a nice day.
This is not investment or financial advice. Always do your research before risking your hard-earned money. Past returns are not a guarantee of future returns.