Ever thought about learning to invest in stocks, but turned it away because you thought it’s too risky and/or complicated? If that’s you, then you need to keep reading. Here are 5 compelling reasons why you should be investing in the stock market.
1. Investing Can Create Another Income Stream
Done properly, the practice of stock market investing can provide a reliable passive income stream. Or if you’re Warren Buffett, about $80 Billion USD give or take a few billion here or there.
Owning stocks can provide income in one of two ways, or even both. The first way is through dividends. If a company has leftover cash at the end of a financial period, its management may decide to reward its shareholders with the cash payment of a dividend. If you’re investing for dividends, make sure you check that the company(s) you’re investing in have been paying them consistently over time without any dividend cuts. The last thing you want is management to authorise dividend cut, or worse, they stop paying them altogether. You can see the history of a companies dividend payments on their annual reports to shareholders. Annual reports are found in the investor relations section on a companies website.
Secondly, the share price could increase above the price you invested in. This is called capital appreciation. Say you invested $100 into Company X at $1 per share, and 3 months later Company X’s share price is $2, you’ve just made yourself $100 dollars. That’s capital appreciation. Keep in mind that companies share prices can fall as quickly as it rises. Finally, ensuring you’re not overpaying for a stock is key to protecting your capital.
2. Investing in stocks is not as scary as everyone says
Stocks receive a lot of negative press, but they’ve actually proven to provide steady returns over the long term. Market Index says that from 1900-2018 in Australia, the All Ordinaries Index, which tracks the average returns of Australia’s largest 500 Companies has achieved an average annual compounded rate of return of 13.1%. Over in the U.S, Investopedia says the S&P 500 Index has achieved a similar return of roughly 10% per annum from 1926 – 2018. So how does that compare to Property investing? From 1993-2018 the Australian Property market delivered an average annual growth rate of 6.8% & 5.9% for houses & units respectively according to CoreLogic. In short, Australian and U.S. stock have performed better than Australian property generally.
Sadly, it’s common for generational curses to embed subconscious beliefs into us. They start with people passing them to us and then we pass them to others. As a result, we never learn to invest in the share market because we’re told it’s too risky. Granted, the stock market does come with its risk, but like anything, “risk comes from not knowing what you’re doing” – Warren E. Buffett.
The barriers that limit our potential as investors can be broken. It’s simply a matter of finding the courage to identify them and act.
3. You don’t need a lot of cash to invest in stocks
We’ve all heard the age-old story. Go to university, get a solid job, save for a deposit and get into the property market ASAP. Sounds like a great plan on paper. But unless you’ve been living under a rock for the past 10 years, you’ll have noticed it’s getting tougher than ever for young Australians to get into property. This is mainly a result of the huge growth in property valuations, which hasn’t corresponded with wage growth.
Considering it’s taking longer than ever to save for a deposit on a property, you should be educating yourself on other proven investment vehicles like the share market to fast track the process of building a solid asset base, which can be used to fund the purchase of more assets.
The cost of entry into the stock market is minimal. Depending on your broker, the minimum investment can be as low as $500 dollars per trade. Hence why this makes getting started affordable for most people. Meanwhile, the deposit on a property is at least $50,000..
Check out our Simple Guide On How To Make Your First Stock Investment In Australia for more info on getting started in the share market.
4. Diversify your assets
Adding stocks as an investment vehicle to your portfolio comes with the benefit of providing diversification. Most of the time other asset values like property, bonds or gold move up and down independently of each other. Holding a share portfolio, believe it or not, can actually protect you against the risk of losses caused by other investment classes should they fall in value.
Diversifying your assets protects you against market volatility, so make sure you don’t keep all your eggs in one basket.
5. Invest In Companies you know & care about
In contrast to popular belief, good opportunities in the stock market don’t necessarily need to be the latest gadget that you don’t have a hope of understanding. As ridiculous as it sounds, most novice investors invest by putting their life savings into businesses they don’t understand or care about. How counterproductive.
Above all, the best investments are made when you buy parts of companies that have meaning to you. Investing in stocks that have meaning allows you to stand for what you value with your money. So, if you like Air Jordan shoes, and value the company that produces them (Nike), you’re well on your way to investing in a business that you can be proud to own for the long term.
Investing in stocks can be very lucrative, but it does come with its risks if you don’t do your homework. Like anything worth doing, investing in stocks will require some time, effort and patience to refine your skills. That being said, you certainly don’t need to be a gifted mathematician to be a great investor.
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Disclaimer: This website (the “The Money Pal”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as financial advice.