There are many advantages of investing in stock market. Investments in stock market have the highest rate of return over the long term than any other type of investment. The price fluctuations and volatility that scare-off most beginners comes into the picture only if the investments are for a short time-frame. Investors with a long time-horizon need not be afraid of the short-term fluctuations. Investors who have weighed in the pros and cons of investing in stock market have come to the conclusion that the advantages far outweigh the disadvantages.
Some of the important advantages of investing in stocks are higher rates of return, liquidity, flexibility and the opportunity to earn a passive income.
Higher Rates of Return
The first and foremost advantage of investing in shares is the possibility for higher returns. In the long term, investing in shares offers the highest rate of return than other modes of investments. Over the years companies grow and expand, and the value of the shares goes up as they grow. The historical average annual rate of return in a stock market is around 12 percent. By investing in a growing stock, the rates of return may be much higher than the average 12 percent.
Other safer modes of investments such as savings account and bonds often give lower rates of return than the rate of inflation. If an investment does not grow at a rate higher than the rate of inflation in the long-term, the investor is losing money because the money will be worth less and less over the years.
Opportunity to Earn Passive Income
The ability to earn passive income is one of the major attractions of investing in stock market. When a person invest in shares, he acquires part-ownership of the company. While there is always the risk that the company may fail, a profitable company can reward the investor by issuing periodic dividends. The only work that the investor has to do is choosing his portfolio. Once he invests in a diversified portfolio of stocks, he can sit back and relax while the stocks earn him profit through dividends and capital appreciation.
Some investors prefer to invest in growing companies where the scope for capital appreciation is much higher. These growing stocks may not offer much in the way of dividends as they will be reinvesting most of their profits into the company for growth and expansion, but the investor is rewarded through capital appreciation of the stock. Other investors choose to invest in large cap companies who have mostly ‘outgrown’ their growth period, but are more likely to give a nice figure as a dividend.
If an investor is not satisfied with the returns of one company, he can always sell the shares of that company and invest in another. The same is not true for a lot of other investments. A person who invests in real estate will have to stick with his investment until he makes a profit on that one.
Unlike other types of investments, stocks offer the greatest liquidity. Selling is as easy as placing an order with the stock broker or setting up a stock order through an online trading platform. A huge secondary market offers investors the benefit of a marketplace consisting of millions of investors and it is easy to match a buyer with a seller.
With stocks, the investor is in command of his portfolio. No others make investment decisions for him, unlike a mutual fund where fund managers buy/sell shares based on their assessment of the stocks. With the introduction of online trading, it is easy to buy and sell shares from the comfort of your home. Moreover, even a small amount can be invested, which is not the case in real estate and gold.
Investing in the stock market is risky, but there are also a lot of pros of investing in shares. It is a good place for an investor who is not averse to risk and who is young enough to withstand the ups and downs of the stock market. As people get older, they can gradually change their asset allocation to a more conservative one.
Want to know when the market is headed for a crash? Learn how to identify the stock market indicators for a crash.
- Stocks Basics, Investopedia article, https://www.investopedia.com/university/stocks/
- Historical Stocks/Shares Performance Returns, https://www.finfacts.com/Private/curency/historicalstocksreturnsperformance.htm
Image Credit: kevinzhengli, https://www.flickr.com/photos/31796655@N07/2974942783/