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The short answer is yes, investing in the stock market is totally worth it. Being able to retire early with a millionaire title or making it your full-time job to becoming a billionaire, the stock market has the power to do both.
But you don’t have to take my word for it, just think about how Warren Buffet and countless others made their fortune. 💹
Please read the whole article to get a better understanding of why investing in the stock market is a pretty worthy investment. In case you are not interested in the extra information, you can jump directly to Why investing in the stock market is worth it.
What is the stock market?
The stock market is a marketplace where people trade securities, which are rights to assets, mostly in shares. A share stands for a ‘share’ (or a portion) in a company.
Companies list themselves on the stock exchange that enables investors to buy and sell shares of those companies.
As an investor, you can buy shares of companies at low prices and sell them at high prices for a profit.
As a company, you can list your company publically on the stock exchange marketplace to get funds which then can be invested back into the company to expand your business.
Though we call it the stock market, other securities like exchange-traded funds (ETFs), bonds, currencies, commodities, corporate bonds, etc. are also traded in the stock market.
How do the stock prices fluctuate?
Ever wondered why stock prices go up and down all the time? Let’s find out.
The basic principle behind the fluctuation is—demand & supply. When there is a high demand for something but the supply is low, the value/price will more likely increase.
On the other hand, when there is a low demand for something but the supply is high, the price will more likely decrease.
Is it risky to invest in the stock market?
Investing in the stock market can be of high risk if you don’t know what you are doing. The only way to risk your money in the stock market is by selling your stocks at a lower price than you bought.
It is very common with the majority of people who invest in the stock market.
Before moving further into the article, a disclaimer—
Disclaimer: I am not a financial advisor, and this is not financial advice. Please educate yourself and think thoroughly before investing your hard-earned money.
Here are a few tips you can use to significantly minimize your risks while investing in the stock market:
Know your risk appetite
This is the first step you should take before investing your money in the stock market. Analyze your risk-taking ability and only invest the amount which you can afford to lose.
If you are the type of person who gets anxious and panicky, please read the last heading in this section.
If you are a type of person who can bear the consequences of losing a significant amount of your money, you can invest in larger amounts, but always have a diversified portfolio (read the next heading for more information about diversification), and educate yourself about investing before risking your money.
On the other hand, if you cannot bear the consequences of losing larger amounts of your money, you should start small and gradually build your portfolio.
In both these cases, you should NEVER panic sell. Again read the last heading in this section to know more.
Always put your eggs in different baskets
You might have heard or read this saying, “Don’t put all your eggs in one basket.” In investing, it means—diversifying your portfolio, meaning you should not invest all your money in just one company/asset.
Even if you are confident about that company’s growth, nobody really knows what is going to happen in the future.
NOTE: People make predictions based on the past and the present performance of the companies. If a company did good in the last 5 years, it might fall into the ground in the next 5 years.
There is no ideal way to diversify your portfolio but allocating small portions of your total investment in different assets like stocks, real estate, cash, bonds, and commodities will help you keep the risk minimum. You can learn more about types of diversification here.
Try low-risk investment options
If you are a beginner in the stock market and are not sure which stocks to pick, you should try low-risk investment options like-
- Mutual Funds
- Index Funds
An ETF or Exchange Traded Fund is a type of security that tracks a commodity, an index, or other types of asset which can be bought and sold on a stock exchange.
A well-known example of an ETF is SPDR S&P 500 ETF which tracks the S&P 500 index.
A mutual fund is a type of investment tool created and managed by professional money managers.
A large heap of money is collected from individual investors and then invested in securities like stocks, bonds, and other assets.
But be careful with investing in mutual funds because it comes with hidden charges and annual fees.
Some other options include,
- A savings account (not a great option to earn interest, you actually lose money)
- Certificates of Deposit (CDs)
- Treasury securities
- Fixed annuities, and more.
Read this article to know more about them.
Never sell your stocks/funds in a panic situation
This is one of the biggest mistakes people make when investing in the stock market. When there is a big drop in the market due to some factors, people start to see their portfolio go down.
They panic about the situation and sell all of their stocks to avoid further loss. It might seem the right thing to do, but believe me, it’s not.
Let me explain why you should not panic sell and what to do instead.
The very first and also the last reason NOT to sell your investment portfolio in a panic situation is that—the market will eventually and inevitably RECOVER again. When investing in stocks, you should always think about the long term.
History has proven it many times, take the 2008 financial crisis, for example, the stock market went down drastically. It kept going down till March 2009. But after that, it recovered, slowly, but inevitably.
Similarly, the Covid-19 situation had a similar impact on the economy worldwide. Markets plummeted around the world. But eventually, they started to rise again. They always do.
Now, if you are in a situation in your life where it is absolutely necessary to sell your investments, you of course can do so.
But in any other situation, it is not a wise decision to sell your stocks at a lower price than you bought.
Let’s now talk about what you should do in such times. You simply should do nothing, in fact, I would invest more in such situations because I know that the market would recover eventually.
Why investing in the stock market is worth it
Whether you want to retire early and save a lot of money for your family, or you want to become a billionaire, in both cases, stock market investing could be a game-changer.
Let’s learn some of the benefits of investing in the stock market:
- Stay ahead of inflation: In all of history, investment in stocks has proved to be a profitable instrument. On average, stocks have given around a 10% return. It is particularly good because the average inflation rate in the United States revolves around 2%.
- Make money with day trading: Investors can earn money through the stock market in many ways. Day traders buy a certain number of stocks at a lower price and sell them the same day at a higher price to make a profit.
Let’s say they average a 10% return every day (which is possible) and they make 5 trades for $1000 each, they can earn $500 every single day!
However, there are serious risks involved in day trading, please make yourself well educated about it before risking your money.
- Make money with long-term investments: The other way of making money is by being a long-term investor in companies. This is what most people prefer as the risk of losing money is lower as compared to day trading.
Big investors like Warren Buffet and George Soros made their entire wealth by investing in the stock market.
- Liquidity: Stocks are said to be liquid assets meaning they can be turned into cash easily. Now take real estate as an example.
It would be difficult to find a buyer right away, and even so, it could take months to get cash in hand. But in the case of stock investment, many buyers would be waiting to buy.
This makes stock investment an easier and hassle-free investment option with great returns as well.
- Advantage of economic growth: The stock market reacts to many factors like the GDP of a country, corporate earnings, inflation, etc.
When an economy grows, so does the corporate earnings, and as a result, the average income of an individual also increases. This affects demand in the consumers leading to increased sales hence the share price of a particular company increases.
As an investor, you can take advantage of this phenomenon and bank in big bucks. (Again, please learn more about the stock market before starting to invest)
- Flexibility to invest smaller amounts: As a stock market investor, you can invest in stocks as little as possible as opposed to, let’s say, real estate. In real estate investing, you need a hefty amount to get started.
- Earn dividend income: A dividend is an extra revenue that investors can get periodically. A dividend is paid out to investors by most larger companies.
When a company earns profit, it decides to share that profit among the shareholders- that is called a dividend.
Let’s understand the power of investing in the stock market with a real-life example.
Here is a graph of one of Elon Musk’s company Tesla showing the price of the last five years.
Let’s suppose there are two persons- John and Bob. They both work in the same 9-5 job, and each earns $40,000 a year.
With a little bit of research, John decides to invest $10,000 in Tesla on March 20th, 2020 (refer to the graph above), and the remaining $30,000 in savings account that yields a 1.5% return annually.
On the other hand, Bob is skeptical about the stock market and puts all of his $40,000 in the savings account provided by the same bank that John put his money in. (For the sake of simplicity, we are ignoring the expenses here)
Fast forward to January 8th, 2021. John sells his $10,000 worth of shares on this date.
Let’s do some calculations and find out their earnings as stock market investors:
- Number of shares at $85.51 per share = $10,000 / $85.51 = 116.95 shares
- Amount of money gained when sold on 8th Jan 2021 = 116.95 X 880.02 = $102,918.339!
He didn’t invest as he was afraid of investing in stocks = $0
Did you see the power of investing? John’s $10,000 turned into $100,000 in a matter of months!
Now let’s calculate the returns obtained by the savings account for both John and Bob, after a year of investing.
- Profit gained after a year of investing $30,000 in a savings account = $30,000 X 1.5% = $450
- Total = $30,000 + $450 = $30,450
- Profit gained after a year of investing $40,000 in a savings account = $40,000 X 1.5% = $600
- Total = $40,000 + $450 = $40,600
NOTE: We are NOT taking inflation into consideration, if we did, they both would actually lose money considering the inflation rate to be 2%. They would lose -0.5% of their invested amount.
Take a look at the table below to understand the calculations and John’s & Bob’s total worth.
|Person Name||Stock investment profit||Savings account profit||Total worth (in $)|
🏆 John is the definite winner here with a whopping profit of $92,768 more than Bob.
Now I’m not saying you should start investing right away without thinking. There is a lot to learn about the stock market before you step your foot into it.
The above example simply presented a comparison between a person who invests in the stock market and a person who does not, and how it considerably affects their worth.
How to get started with investing in the stock market
Now that you’ve learned about why investing in the stock market is worth it, let’s find out how to get started with investing.
Please note that this is not a comprehensive guide on getting started with investing, rather it is just a brief outline.
Step 1: Determine what type of investor you are
Basically, there are two ways to approach investing—
An active investor is someone who is committed full-time to investing in the stock market.
If you are the kind of person who loves to keep an eye on the market, enjoys researching individual stocks, and reads about companies to buy stocks in, then you fall in an active investor category.
NOTE: Day trading is also an active form of investment (it is more of a full-time job than investing), but since it is a high-risk option, I DO NOT recommend getting into it if you are an absolute beginner. There are so many technical terms, indicators, and strategies that are needed to be learnt before getting started with it. That is why I have not included it in this article. Feel free to look it up on the Internet and always be cautious about taking any monetary action.
On the other hand, if you don’t like to analyze the market, you are not intrigued by the rise & fall in the stock market, and generally are busy or don’t want to waste time in analyzing and learning about the stock market, then you fall under the passive investor category.
Both these ways are great and have their own reasons for being so. You just have to determine which one of these are you and move to the next step.
Step 2: Open an investment account
To be able to start investing in the stock market, you will need an investment account.
For active investors, an online brokerage account is required. An online broker is a firm or company that helps buy and sell securities on behalf of an investor.
Most online brokers provide you the power to invest in stocks, index funds, mutual funds, and other securities as well. Some online brokers are E*Trade, TD Ameritrade, WeBull, Robinhood, etc.
Please choose your broker carefully based on trading commissions and other charges, as well as the types of investment options they provide.
Read this article to decide which broker to choose according to your investing goals.
For passive investors, opening a robo-advisor account is the best option.
A robo-advisor is a digital platform that provides investment solutions for individuals who don’t want to do the heavy lifting of picking the right stocks.
It is an algorithm-based digital platform that asks a bunch of questions about your financial needs, your risk appetite, etc., and then creates and manages your portfolio for a charge.
Check out all about robo-advisors here.
Step 3: Start investing (stocks or funds?)
Now that you have opened an investment account, you have to decide how much you should invest and in what type of security.
There are basically two types of investments to consider:
- Individual Stocks
- Funds – ETFs & Mutual Funds
We have already learned about them in detail above.
Step 4: Think long-term
Always think about the long-term benefits of investing and how compounding works.
Albert Einstein said, “Compound interest is the eighth wonder of the world, He who understands it, earns it. He who doesn’t, pays it.”
The basic formula here is- invest in shares of great companies at good prices and hold on to them as long as the company is doing great, or you really need the money.
Keep on investing more and more and you’ll see exponential growth in your portfolio. That’s how compounding works.
Step 5: Keep an eye on your portfolio
You don’t need to check the prices of your stocks every hour. That would not be a wise thing to do. But do analyze the performance of companies you have invested in.
If you felt like a company was doing pretty good in the last 6 months, you could buy more shares in it.
And if you felt like a company was on the decline from the last 6 months, you could transfer some percentage of your investment to some other promising company.
Keep visiting your portfolio a few times every year and make sure to have a healthy balanced diversification.
To conclude, let’s look at what we have learned so far:
- What is the stock market?
- How do the stock prices fluctuate?
- Is it risky to invest in the stock market?
- Why investing in the stock market is worth it
- How to get started with investing in the stock market
Hope you enjoyed and learned something from this article. If you have any queries, feel free to ask them in the comment box below.
Please share this article with people who may need it. Always be cautious while investing. See you in the next article.
Now go break some eggs! 🥚