It is difficult to predict stock market movements, but despite this volatility, the benefits of investing in stocks remain unchanged. What needs to change is the public’s perception of the stock market and the risks associated with it.
Cheaper Than You Think
Investing in the stock market is a well-known way to make your money work for you, but you don’t have to spend thousands of dollars to get started. You can start by saving the many dollars you usually spend on your daily coffee and invest the amount you save in stocks or index funds. It’s almost an easy way to use your earnings to serve your future.
This is even more true now because you don’t have to save large amounts of money to get started. On many investment platforms, you can buy a small fraction of a share in a company you like, or what is called a fractional share. Many investment apps and robo-advisors have low fees or costs, making it easier to get started as well.
One of the most common types of investments for new investors is a Dividend Reinvestment Plan (DRIP). DRIPs automatically reinvest any dividends by purchasing more shares. Investing in DRIPs can save money by not paying brokerage fees for transactions since shares are purchased directly from the company offering the stock.
Over the years, your stock holdings and dividends accumulate and grow at an accelerated rate. DRIPs harness the power of compounding without requiring any additional money from you.
Beating Inflation
Inflation, which is the decrease in the purchasing power of currency over time, is not your friend when you are trying to save a significant amount for a major purchase or a home or to fund a comfortable retirement. Consider that the Federal Reserve aims to keep inflation at around 2%. Then think about how this can reduce the purchasing power of money in a Certificate of Deposit (CD) or savings account.
Any account or investment needs to earn at least 2% to keep pace with inflation. Unfortunately, even high-yield savings accounts do not offer rates that high.
Typically, you can earn a higher interest rate on Certificates of Deposit than on savings accounts, and you may even be able to keep up with or slightly exceed the target inflation rate. But your money is tied up for the term of the CD, which can range from 30 days to 10 years.
Note: If you have to withdraw your money before the CD term is up, you will incur an early withdrawal penalty, which will erode your earnings even more.
Growing Your Wealth
If you decide to invest in stocks to grow your wealth, remember that there are no guarantees about how your stocks will perform. However, it is not necessary to buy shares in the next Amazon or Apple to earn a respectable return.
Consider that the stock market has averaged a 10% annual return on investments, as measured by the S&P 500 index. This is despite the volatility of the stock market and its tendency to change rapidly, which occasionally culminates in a historic crash characterized by a sudden double-digit percentage drop in value.
Diversifying Your Investments
Diversify your investments by including some stocks alongside your bonds (and other fixed-income securities). Certificates of Deposit and savings or money market accounts can help protect you from the natural fluctuations in financial markets. Often, when the stock market is down, the bond market is up and vice versa. It’s about being able to manage volatility (also known as risk) by strategically placing money in investments and bonds.
Note: In other words, don’t put all your money into just one type of investment.
The Market
Not Against You
The stock market does not know you or your plans. It has no agenda, and it never cares about your agenda. Despite what you might have gathered from late-night TV commercials or junk mail, there are no magic formulas for investment success.
Successful investors have no secret tricks up their sleeves, and there are no secret passwords or handshakes. In fact, there isn’t much separating you from successful investing, other than a little research and understanding the rules of the game.
Some of the basics include how to determine stock prices and how to apply the principle of “buy low, sell high.”
You Don’t Have to Be a Genius
An experienced investor may have an edge over you as you start, but you don’t need to be a mathematical genius, wealthy, or another Warren Buffett to invest in the stock market. Compared to investing in a franchise or starting your own business from scratch, the requirements for investing in the stock market are modest.
Note: Choose stocks issued by companies you know in industries that interest you. This interest helps you stay informed about your investments.
Investment requirements include researching the companies you are considering investing in, which usually means reading their annual reports (which you can typically find by exploring their websites) and regularly setting aside some money to invest.
If you have a grasp of fifth-grade math – addition, subtraction, multiplication, division, fractions, decimals, and percentages – you are likely to understand investment concepts with time and research.
Take Your Time Investing in the Market
There’s no need to rush into investing in the stock market now. First, do your homework, set realistic goals and expectations, and find out how to use the available information to your advantage.
Gain a better understanding of the market by using investment simulators for some time as preliminary training to see how you perform before jumping into the market. Remember, while the stock market can sometimes seem harsh, investing can also be an exciting and potentially profitable activity.
Frequently Asked Questions (FAQs)
Why is it good to invest in bonds in addition to stocks?
Not all investors want to buy stocks and bonds, but many enjoy the benefits of diversifying their portfolios with multiple asset classes. Bonds aren’t guaranteed to perform well when stocks decline, but they are typically less volatile than stocks, which can help reduce the overall volatility of your portfolio and improve average gains.
Why do some people invest in small-cap stocks?
Some investors intend to diversify their portfolios with bonds to reduce their portfolio volatility, but others seek more volatility and risk with higher gains/losses. These investors may want to diversify their portfolios with small-cap stocks, which are considered among the highest-risk assets available with the potential for huge gains (as well as total losses). This is also true for cryptocurrencies, especially new, low-priced, meme coins. Such investment types are suitable if you enjoy risk and the thrill of the game. However, you should research each investment before putting your money into it.
Why would someone invest in mutual funds instead of stocks?
Many mutual funds contain stocks, but investing in them is quite different from investing in a single company’s stock. Mutual funds make it easy to diversify your portfolio with high-quality investments. Selecting investments and knowing how to trade them is tough, especially for beginners, but index funds and other mutual fund products turn these decisions into a task done by professionals who manage your money for a small fee.
Source: https://www.thebalancemoney.com/part-one-the-stock-market-doesn-t-care-about-you-3141062
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