Why Invest in the Stock Market?

Posted:Abigail Andrews – Saturday, May 26th, 2007

The answer is simple. Do you want your money to work for you, or you want to work for money all your life? Keeping money in the bank is not an investment, you may as well not bother, the returns are, well, usually not much more than inflation. Banks are not an investment, they are basically just a safer place to keep your money than in a box under your bed. If you invest that money in stocks, there is a real possibility of making in a day or two the returns you would only realise in a year in the bank. Yes, there will be some risk included, but did anybody ever made any substantial money without taking any risk?

Is the Stockmarket Risky?

Are you spooked by the word speculation? Does the word risk frighten you? It shouldn't, because there is an element of risk in all investments, you probably just don't realise it! For example, when you invest in property you are putting your confidence in the property market rising and your confidence is based on the speculations of housing market experts. In recent years your speculation in the property market has been justified but that may not always be the case. If you want to make money in the stock market you have to take some risk.

Ultimately, there is no risk free investment. The only difference is that some investments involve more risk, and some less. But usually those investments that carry more risk have greater return. It is pretty exponential, the more risk you take the bigger return you can get, but beating Bank's return should not involve too much risk. The risks are discussed here but for now take note of the fact that it is possible to make 10-15% annual return on your investment with almost no risk at all.

Take Control of Your Investments

Most people have investments in the stock market through life policies, saving schemes, unit trusts, investment bonds and perhaps a few hundred shares they were left as inheritance. Many such investors don't have the time or the inclination to actively participate in the stock market by educating themselves and learning the necessary skills to manage there own share investments, but nevertheless wish to benefit from economic growth and protect themselves from the inflation. If you start taking control of your share investments and stop letting others control them for you, there is the potential to make MUCH more in stock market speculation than through those investments mentioned above.

The question I ask is why are people so eager to put their finances "on the line" by taking control of their own destiny on the property market, BUT are so scared of the stock market that they leave that in the hands of the so called "stock market experts"? Why don't people take control of their stock market investments themselves? Many teach themselves about property investment but few are willing to teach themselves about stock market investing?

Stock Markets Open to All

Until recent years taking control of your own stock market investments was out of the control of the average investor. Until the advent of the internet stock market investing for a private investor was much harder to do than it is today.

Around 1995 the stock market began to change and became more of an opportunity for the private investor. The Internet brought online brokers and sites like ADVFN offering FREE streaming stocks and shares data from around the world. As a result more and more people are choosing to take control of their own finances and ultimately their own future by choosing their own investments on the stock market. The internet has brought the stock market into our homes, its never been so easy to speculate and make money on the stock market (........oh, and just as a warning, lose money too!) So I still don't understand why people are scared of the stock market, so much so that they wont even invest in the share save scheme of the company they work for, not even hand over their savings to a broker to invest for them, never mind take control of their own share investments!?!?!

Why are people so frightened of the stock Market?

To be fair, speculating on the stock market is not easy. Successful speculators spend a great deal of time studying the market and developing skills to out perform normal investors. Finding a winning share is not down to luck, its down to education and research. Yes, there are people who get lucky, but they wont get lucky all the time, and in the long term they end up losing a lot of money.

Some people are tempted by stories of shares bought for a few pence and sold for several pounds. They have little knowledge of how the market works, how to start trading in shares, or how to proceed once they hold them. When they get bitten and lose some of their hard-earned money, they moan about bad luck and put their depleted capital back into the building society. Or, worse still, they become desperate and gamble wildly in an attempt to retrieve their losses. It's those people who make wild speculations on the stock market that put the curious investor off. The curious investor who may be thinking about trying their hand at stock market investing is easily put off by the frightening stories of the man who lost it all!

What are the benefits of share ownership?

The most important thing to remember about investing in shares is diversification. If you invest in a small number of shares the risk of you losing money is greater so you need to invest widely in different types of company and different countries.

If you only have a small sum to invest the best way to do this is to put your money in an investment fund. Funds, which pool the investments of a number of investors, are a good bet because they employ professionals to invest your money in a variety of shares, usually more than 50. They also enable you to access markets where it is difficult to buy shares directly, such as the Far East and Japan. You can also use ETFs and covered warrants to access markets. Read more on the alternative options.

If you have a larger sum to invest you can look at buying individual shares. Buying shares can be enjoyable and profitable but you need to invest time in picking the right shares and areas to invest in, monitoring your investments and, choosing the right time to sell. Are you suitable to manage you own stock portfolio?.

There are two ways you can benefit from owning shares:

• through the growth of the company and thus share price rises, known as a growth stock. Popular with investors who do not need income from their investments. Growth stock is not a short term investment though. Your money is likely to be tied up for a number of years while the company grows.
• through dividends. If you own shares in a company you are entilted to any divided it pays out. Shares that pay dividends are generally known as ‘Income’ stocks.

The fact economies spend longer in a growth period than in recession has helped shares produce better returns than other assets and, crucially, beat the effects of inflation.

Savings accounts do little to protect your money from inflation as your real rate of return is small. Shares, on the other hand, do have the ability to produce better gains.

But, as investors who had money in the stock market between 2000 and 2003 will testify, share ownership is not without its risks. Read more about the risks.

Give it a go!

Now here is something to take note of, don't be scared of the stock market, share investments are similar to property investments in that, over the long term, if you do your research and invest wisely, you will make money. Despite the bear markets (where stock values fall), UK shares have still, on average, returned 7% over the past 50 years, a far better return than if your money was in a cash account and far better than any savings account!! Now that's something you probably didn't realise!

In the next few sections you can learn more about stock market investing and decide whether you want to learn how to invest your money yourself or whether you would be best employing a broker to manage your investments for you. One thing is for sure, it is wise to have at least a small percentage of your investment strategy based on stock market investments. Read on, you may learn something useful.

Popularity: 9% [?]