If you ask someone “why do people buy stocks?” you are likely to get one resounding answer – to make money! People buy stocks as an investment hoping that the worth of the stock will rise over time. Some investors look for income from their investments and pick stocks with higher dividends to augment their lifestyle.
Rather than putting your money in a low-interest savings account, the stock market offers an exciting opportunity to grow your money. What most people don’t realize that there are many different aspects to “making money” beyond the profiting from upticks on stocks.
“Making money” is an umbrella term under which there are a myriad of strategies and avenues to employ when it comes to building wealth. Deciding whether you are a trader looking to make a quick buck, an investor who is saving for the future, a retiree living out their dream of restful secure golden years, or combination of the three, is crucial to assembling a stock portfolio that suits your needs.
Why Do People Buy Stocks? Why Don’t People Buy Stocks?
Take a look at what the banks are paying in interest in a traditional savings or money market account. In a word – SAD. While it is important to have at least six months of emergency liquid savings on hand in the event of job loss or injury, your money will not grow nearly as fast in your bank’s savings account as it would even in a plain vanilla index fund that tracks the S&P500 (average return is 8%).
As far as returns go, the market can not be beat by bank accounts, CDs or money markets (most pay less than 1%). There are several options to growing your money in the stock market, from full-service to discount stockbrokers, there is a service level and price point for every investor.
You must be willing to make a ten or more year commitment to whatever stock you purchase. That means to pick a high quality company, buying at a discount, beginning a dollar cost averaging program, always reinvesting your dividends and forgetting about them for the next decade.
Going against this advice has been known to produce painful consequences. This fact is illustrated on Wall Street every day. While professional financial advisers fail to beat the Dow Jones Industrial Average, the retail investor is left feeling like there is no hope, wondering why do people buy stocks?
This is why carefully reviewing your investment plan and selecting stocks accordingly is the right way to grow and preserve capital.
Why Do People Buy Stocks And Not Bonds?
It has only been since World War II that stocks have outperformed bonds in the total-return department. From 1870-1940 returns on stocks and bonds were about even. Then in 2000-2002 bonds outperformed stocks, until 2003-2004 when stocks were hot again. The bond market, once again, took the lead against stocks in 2008.
So, why do people buy stocks and not bonds? While bonds are fancy I.O.Us, you can still lose money. While their life span is fixed, as well as their interest payments, their returns are not.
Historically, stocks have been used as a hedge against inflation. Because a bond payment is fixed, its value could be eaten away at by inflation. With long term bonds there is a high inflation risk. Stocks have traditionally outpaced inflation to act as excellent avenue to capital appreciation, while bonds’ steady rate of return make them desirable for capital preservation.
As always, both stocks and bonds rely on the laws of supply and demand, exhibit volatility, and carry significant risk of loss. Research all potential investments before committing any capital.
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