OK, let’s start with the basics.
You know a little about the stock market, but you’re not sure if you should (or even want to) invest your own money.
Whether you’re new to the stock market, thinking of getting back in, or just want a refresher on why we invest in stocks – this article is for you.
Below we cover the 15 major reasons why you should invest in stocks. And then after that we’ll add a little more color and examples as to why stock market investing can be so powerful.
First, let’s start with the hard fact-based reasons to invest in stocks, and then we’ll transition into some less discussed (but still important) personal and professional reason to invest.
1) Invest in Stocks to Grow Your Money
This is the simplest reason to invest and is often at the core of why people invest in stocks.
When done right, you can grow the money you invest by anywhere from 7% – 10% per year over the long term.
We’ll break down how much money you can make investing in an upcoming lesson (Lesson 3 of 43: How Much Money Can You Make Investing in Stocks?), but let’s just look at a simple example quickly.
If you invested $10,000 into the stock market today and it gained roughly 7% per year, you’d turn that $10,000 into $20,000 in just 10 years.
Think about that. Imagine 10 years ago you put $10,000 into an account, invested it in some stocks, made some trades, and now 10 years later you have your original $10,000 PLUS another $10,000 you made from investing.
Or, let’s look at an example for someone who is a good steady saver and a smart investor. Imagine you invest $10,000 of your savings into the market every year for 30 years.
That’s $10,000 this year, another $10,000 next year, another $10,000 the year after that, and on and on for 30 years.
So in total, you will have invested $300,000 in stocks over 30 years ($10,000 per year x 30 years).
And let’s assume you achieve the same average yearly returns we used above, 7% per year.
So you’ve invested a total of $300,000 over 30 years – but guess how much you have in your account at the end of that 30 years.
You know it’s going to more than the $300,000 you invested over 30 years, because the money should have grown because you invested it in stocks.
But it’s how MUCH it has growth that’s surprising. That $10,000 investment per year for 30 years would now be worth $1,010,730.
So through regular investing, you can turn $10,000 per year into more than a million dollars over 30 years.
Now $300,000 of that million dollars is the money you directly invested each year. But the other $710,730 is money you made from investing in stocks.
Here’s what it would look like visually:
Note that the blue section of each bar is the amount you have deposited (your $10,000 in savings each year) and the larger gray section of the bar is profit you made in the stock market.
The point is not the specific numbers, returns, or time horizons. Those numbers could all be very different for you personally.
The important point is that investing in the stock market can make your money grow much larger over time. And that’s the #1 reason people invest in stocks.
2) Invest in Stocks Because Historically They Have Gone Up
Overall, stocks have tended to rise over the last 100 years.
Yes, there have absolutely been nasty crashes, pullbacks, and periods of bad performance (we’ll discuss all these in a future lesson: Lesson 10 of 43: Stock Market Crashes: Why Markets Decline & How to Survive). But overall, stocks have formed a steady march upwards as the U.S. and global economies have grown.
For example, here is the S&P 500 (which is just a group of 500 large companies) from 1926 – September, 2018.
While there are lots of ups and downs along the way, the market has generally moved upwards overall. And if you bought stocks and held them for 30 or 40 or even 50 years, you would’ve made a lot of money.
In fact, just one single dollar invested in the shares of small companies (known as small cap stocks) in 1926 would be worth nearly $40,000 today!
Many people invest in stocks simply because the odds are in their favor that over time, the market will go up and earn them money.
3) Invest in Stocks for the Power of Compounding
We showed the power of compounding a bit above, and we’ll cover it in much more detail later, but here’s the basic concept:
If you earn a good steady return on your investments (nothing crazy, just a good return) over a long time period (like 30, 40, 50, 60, or more years), that investment grows WAY bigger than seems possible.
For example, we covered above how investing just $10,000 per year for 30 years while earning a 7% yearly return turned into well over a million dollars. But let’s look at an even longer timeline.
Let’s say you followed that same strategy (investing just $10,000 per year and earning 7% returns per year) for 60 years, instead of just 30 years.
Now your regular investment of just $10,000 will have grown to an astounding $8,104,668!
We’ll explain why compound interest is so powerful in a future lesson, so for now we’ll leave it at this: there’s a reason people often refer to “the magic of compound interest.”
If you start early, save steadily, and invest intelligently, your money can grow in truly amazing ways over time.
4) Invest in Stocks Because Money Sitting in Cash Will Lose Its Value
You’ve probably heard of inflation before, but it’s sort of a strange concept.
To put it simply, think of inflation as the slow but steady force that makes things cost more over time.
Remember how your grandfather could go see a movie for a dollar? Well now it costs you $10, $15, or even $20 to go see a movie. That’s largely because inflation makes the price of products and services go up over time.
What that means for you is that your hard-earned money is slowly losing its value over time.
Terrifying, I know.
For example, if you save $10,000 this year and put it under your mattress for the next 30 years, it won’t be $10,000 when you take it back out.
I mean, yes, it will still be 10,000 U.S. Dollars. But it won’t be worth what it was worth when you first earned it. So if your $10,000 today could buy you an incredible trip around the world, in 30 years when you take it out from under your mattress it may only be able to buy you two nights in a nearby hotel.
Now inflation can vary over time and we’re not going to get into too much detail here. But just remember this: When your money is sitting in cash it is steadily eroding in value.
How fast does it erode? That depends on the current rate of inflation.
Since the year 2000, the annual inflation rate has mostly been between 1% – 4%. That means every year, your money’s buying power erodes by 1% – 4%. Yikes.
If you buy treasury bonds or put your money in a Certificate of Deposit (CD) at your local bank, you’ll probably earn just enough to avoid inflation. But even that’s not a great deal, because in the stock market you could earn so much more.
For example, as of September, 2018 the annual inflation rate in the U.S. is 2.3% per year. The best CD rate we could find online was a six year CD from Goldman Sachs offering 3.2% per year.
While that’s better than the current rate of inflation, it’s not by much. So the value of your money is basically just staying the same.
Put simply, if you have enough money saved up to buy a new Honda today, and you put that money:
…under your mattress, in 30 years you’ll be able to buy a bicycle.
…into a certificate of deposit (CD), in 30 years you’ll be able to buy a nicer Honda.
…invested wisely in the stock market, in 30 years you’ll be able to buy a Maserati.
5) Invest in Stocks Because You’ll Make More Than Other Investments
We have an entire section on stocks vs. other investments coming up, so we’ll keep this simple.
Looking back at history, stocks have earned more wealth for investors than most other investment options. On average, investors in the U.S. have profited more from buying stocks than from buying bonds, buying a home, or most other investment options.
For example, look at this chart from Morningstar which shows how much money you would have if you invested just one single dollar into large stocks, small stocks, government bonds, or treasury bills since 1926.
Not even close. Small stocks and large stocks leave bonds and treasury bills in the dust.
One exception may be investing in residential real estate (for example, buying an apartment building and renting out the units to tenants). Research suggests this could return roughly the same as stocks over the long term, once you consider both the slowly appreciating value of the property AND the value of the rent you collect.
We’ll dig into some other comparisons in an upcoming lesson (Lesson 5 of 43: Stocks vs. Bonds, Mutual Funds, ETFs, Real Estate, and Robo-Advisors), but for now just remember that stocks have historically been one of the best ways to grow your money.
6) Invest in Stocks Because They’re Easy to Invest In
If you’re fortunate enough to have some savings, you’re faced with a wide range of places to possibly invest your hard earned cash.
You could buy real estate, buy bonds, start a small business, invest in a mutual fund, collect precious coins, and much more.
What’s great about stocks is that they’re relatively easy to invest in. You sign up with an online trading broker (for example, Fidelity, Vanguard, E*TRADE, or Charles Schwab), click a few buttons, and buy some stocks.
Now, there’s definitely research to be done along the way to make sure you’re making the right investments for you. We’re not suggesting you buy some stocks and just forget about them.
But compare buying stocks to buying real estate or investing in a small business. Stocks are fast, easy, and cheap to trade, whereas real estate and many other investments are not.
Stocks are often called “liquid assets,” which just means they can be turned into cash relatively quickly.
For example, if you had $1,000,000 invested in the market at 3pm on a Tuesday and you wanted to get all your money out right away, you could most likely turn that million dollars into cash in a few minutes with just a few clicks.
On the other hand, an “illiquid asset” may take time and money to turn into cash. Think of owning a highly valuable painting. It would take you weeks (maybe months) and likely some money to find the right buyer and sell your painting at a fair price.
A lot of people invest in stocks because they feel like their money is never far away and can always be called home in an instant.
As we’ll learn later, this can be both a good thing and a bad thing.
7) Invest in Stocks for Tax Free Profits
The government offers several types of tax free accounts that allow you to legally avoid paying taxes on your investments.
For reasons we’ll get into in a future lesson, avoiding taxes can make an ENORMOUS difference in how much money your investments earn over time.
And the more money you earn and invest, the greater the incredible positive impact from avoiding taxes.
But in order to take advantage of these tax free retirement accounts, you typically have to invest in stocks or similar types of investments (for example, mutual funds or ETFs).
If you decide to sit out of the stock market, you’re missing out on a HUGE gift from the government: decades and decades of tax-free investment growth.
8) Invest in Stocks to Save for Retirement
Many people invest in their retirement accounts not just for the tax-free returns discussed above, but because they want to have a nice big nest egg to live off when they retire.
You’ve heard it before (and we’ll say it again now and probably ten more times), if you start investing when you’re young, you can build a tremendous amount of wealth for when you’re older.
Tax-free retirement accounts help fuel the growth in your investments, as do steady long-term deposits from your regular income.
If you’d like to stop working at some point and don’t want to simply trust that social security will be there to support you and your family, investing in stocks can be a great way to save for retirement.
9) Invest in Dividend Stocks for Steady Income During Retirement
Dividend stocks are special because they actually pay you real hard cash on a regular basis.
We’ll cover dividend stocks in much more detail later on, but for now just remember that dividends provide steady income in the form of regular cash payments.
Depending on the stock you buy, dividend stocks could pay you cash ranging from 1% up to 10% (and beyond) of the total money you invest, every year.
For example, let’s pretend you buy a portfolio of 20 dividend stocks that overall (as a group) pay a dividend of 4% of your total investment. And let’s pretend you’ve just retired after a long and successful career, so you’re comfortable investing $500,000 of your life savings into this portfolio.
Every year, that portfolio of dividend stocks would pay $20,000 cash into your account just for owning them ($500,000 investment x 4% annual dividends = $20,000 per year).
Most dividends are paid quarterly, meaning that $20,000 in dividends would arrive a little bit at a time throughout the year (not a single $20,000 payment all at once).
And that doesn’t even account for the possibility that those stocks will go up over time, which would make you even more money!
Retirees tend to like dividend stocks because regardless of whether the market goes up or down, they receive a steady dividend check of cold hard cash.
10) Invest in Stocks for Diversification
Buying stocks allows you to diversify how your money is invested and how you make income for yourself and your family.
What does it mean to “diversify?”
Basically, the more ways you have to make money, the less you’re at risk from getting in financial trouble if any one method were to be disrupted.
For example, let’s pretend you have a full-time job, rent out an extra room in your house to a college student, occasionally do handy work on the weekends, and invest in dividend stocks.
If any one of those sources of income were to dry up (for example, you lost your full-time job or you hurt your back), you wouldn’t totally lose your income. Because you have some diversity of income, the extra room rental and dividend stocks could help carry you through a rough patch.
It’s the same concept with investing. Owning stocks can diversify how you invest your money.
Maybe you’ve got some money in your company’s retirement plan, or saved in a bank account, or invested in CDs, or something else. Stocks can be another type of investment, diversifying against potential trouble in any one area.
11) Invest in Stocks So You Can Own Part of a Company You Love
When you buy even a single share of a company, you’re officially a part owner.
If you buy Apple (AAPL) stock, you’re actually an owner of the company.
Tim Cook, Apple’s CEO, legally works for you!
Sometimes people are passionate about certain brands and products and like to own a piece of the company they believe in.
And not only does that make them feel good, but it comes with another big benefit…
12) Invest in Stocks so You Can Vote on Big Issues You Care About
When you own shares in a company, you’re legally allowed to participate in shareholder votes on big issues. You can approve or deny things like a proposed merger, the hiring of a director to the board of directors, even executive compensation packages.
As an investor, you’re given a “proxy vote,” which means you can vote remotely (usually electronically or by mail) on major issues to be decided at the upcoming shareholder meeting.
If you’re passionate about a certain company, buying its stock is a great way to ensure you have a voice on some of their big decisions.
13) Invest in Stocks to Profit from Industries You Know Well
Famous Fidelity investor Peter Lynch is known for his philosophy of, “Invest in what you know.”
The idea is that you’re probably an expert in something, and you’re likely to be able to make very smart investment decisions in that area of expertise.
For example, if you work as a dentist in your full-time job and you notice a breakthrough new dental technology that’s taking the industry by storm, you should consider buying their stock.
You see, as a dentist (or whatever your speciality may be), you are uniquely positioned to spot companies that are poised to grow in your own industry. And if you buy their stock, you can profit handsomely before others catch on to the opportunity.
Now, in practice it’s not always that simple. While “Invest in what you know” can be a good move occasionally, it shouldn’t be your main stock investing strategy.
But every once in a while, you’re uniquely positioned to spot something before everyone else does. And that’s a great way to make money.
14) Invest in Stocks to Learn
Investing in stocks will teach you a ton!
You’ll learn a lot about the stock market, and how companies work, what makes them succeed or fail, how products come to market, how economies impact companies, and much more.
Plus, you’ll learn to think in new ways. Investing in the stock market requires logic, analysis, and thoughtful reflection. Practicing these skills with investing is sure to sharpen them in other parts of your life as well.
15) Invest in Stocks to Have Fun
Investing in stocks is fun!
You get to learn about companies and products, analyze CEOs and company leaders, and make important decisions that can have a huge impact on your financial future.
There’s nothing quite like buying a stock and then watching it go up and up and up over time. You’ll log into your account one day and see how much you’ve made and get a proud giddy feeling.
Like those who enjoy fantasy football, it’s a lot of fun when your picks win big.
Closing Thoughts on Why You Should Invest in Stocks
So that wraps up our first lesson on why you should invest in the stock market.
Honestly, investing in the stock market is about learning, having fun, and making money.
But you know, it’s about more than just “making money.” Done right, investing in stocks allows you to use money you already have to make more money with minimal effort.
Let’s say you want to invest $10,000 in the stock market. How long did it take you to earn that $10,000? Keep in mind you probably had to earn a lot more than $10,000 to pay the tax man and then end up with $10,000 in your pocket.
So how long did it take you? Did it take six months? Three months? One month? One week? One day (wow, good job!)?
However long it took you to earn that $10,000, I’m guessing it was pretty hard work.
Now what if you could invest that $10,000 in the stock market, do some occasional research and trading, and over the course of 10 years turn that $10,000 into $20,000.
In other words, what if you could double your money in 10 years?
While the first $10,000 might have taken you weeks or months of hard work to earn, the $10,000 in profit you made in the market was earned while you were off doing other things.
That’s what they mean when they say, “Make your money work for you.”
It’s also what legendary investor Warren Buffet was thinking about when he said, “If you don’t find a way to make money while you sleep, you will work until you die.”
You’re out there working hard to earn $10,000 while your money is also out there working hard to earn you ANOTHER $10,000.
And how fast your money can earn that next $10,000 depends on how good of an investor you are. The better you are at buying the best stocks, the faster your money will grow.
Now, of course, it’s not quite that simple. You can’t just throw your money in the stock market and it will automatically grow. There are many risks, pitfalls, and challenges along the way (which we’ll cover in detail).
And the stock market isn’t right for everyone. It takes commitment, patience, smart decisions, and steady work to make your money grow over time. Skip out on any of those things and you risk losing money in the stock market.
But overall, we think the stock market is one of the greatest ways to grow your wealth. And it can require relatively little effort on your part.
If you do it right (and that’s a HUGE “if”), it can be easy money.
Next up, let’s talk about something basic but critically important: “Lesson 2: How Do You Actually Make Money with Stocks?“