Good reasons to start investing in the stock market
There are definitely good reasons to start investing. As you move from a borrower to a lender and investor, interest payments begin to flow to you rather than from you into someone else’s pocket. You start to be able to buy things you want with money that you did not need to earn with the sweat of your brow, instead of working overtime to pay the interest on something you bought on credit.
By putting off shopping, acting like an adult and delaying pleasure instead of a two-year-old, and demanding everything now, you can have the things you want and the cash to buy them. You can have your cake and eat it too. Those vacations will seem sweeter and that car will drive better when you don’t have a pay stub waiting for you at home. You may even pay less for things, as most sellers will give a discount to those with cash.
When looking for different investment options, there are many options to consider. Options, ranging from least risky to riskiest, include savings accounts, money market funds, government savings bonds, treasury bonds, paid real estate, corporate and municipal bonds, Preferred Stock, Common Stock, Penny Stock, Warranties. , commodities and options. Even though common stocks are nearing the bottom of that list, meaning they are riskier than many investment options, there are good reasons to start investing in the stock market. These are as follows:
1) Stocks can exceed the rate of inflation, leading to capital growth. Of the options on the list, the ones that come before real estate will not provide a sufficient return to beat inflation. This means that the value of money in those instruments decreases every year. If you need the money for years to come, it won’t make a big difference. But if you’re saving for retirement, the dollars you invest today in money market funds, treasuries, and the like will be worth only a fraction of their value when you retire. Real estate (which is bought entirely for cash), on average, will only track the level of inflation (although there are special situations if you are investing in specific properties and you know what you are doing). Penny stocks, warrants, options and the like significantly increase the risk that you will lose your money in a short period of time. Common and preferred stocks rank nicely on the risk curve where you can beat inflation, but you can turn the odds in your favor.
2) Long-term stock ownership allows for capitalization by delaying taxes. Capital gains taxes on the shares do not expire until the shares are sold. This means that investors who hold shares for long periods of time can enjoy the benefit of compounding for years without paying capital gains tax until the shares are sold. Warren Buffett and Bill Gates have paid very little in taxes, despite their enormous wealth, because most of their wealth is in stocks in their companies. Because they sell only a few stocks each year, their tax bill as a percentage of their equity is very small. Warren Buffett will never pay taxes on most of his estate because he donated it to the Bill and Melinda Gates Foundation.
In contrast, those who earn a paycheck see 25-35% of their earnings deducted for state and federal income taxes and another 15% for payroll taxes before they even see it. Note that if shares are held in a mutual fund, capital gains tax will be due if the mutual fund sells shares in the fund at a profit and distributes the proceeds to you even if you do not sell shares in the mutual fund. This is one reason for finding funds with a low turnover or “churn rate.”
3) Invest in Stocks require much less effort than other types of investments. Real estate can be a great investment if you know what you are doing, but you often need to have it as a hobby. If you want to buy, renovate and resell houses, count on spending many hours in the house doing much of the work. Even if you hire the job, losing much of your earnings, you will rarely find someone as committed to the project as you are, as it is your home.
If you rent houses, count on doing a lot of repairs yourself late at night or paying others a fortune to do it. Because they don’t pay it, tenants care little that Sunday rates are 2-3 times the weekday rates. They’d probably be more willing to break a sweat if they paid for air conditioning repairs on a Saturday night.
With long-term investing in stocks, you simply need to spend a little time searching for stocks to buy, calling a broker or entering trades on a website, and then monitoring the stocks from time to time. Because a good investment is long-term and based on business, rather than short-term price fluctuations, it doesn’t really require a lot of commitment. Just check things out once in a while, read the annual reports to see that the company is still doing what you bought it for, and then leave things alone. At times when the markets are crashing, taking everything with them, it’s actually better to ignore your holdings for a while rather than panic selling at low prices.
For even less care and feeding, a pool of index mutual funds can be purchased. In that case, the only maintenance required is to rebalance the money in the funds once a year. As retirement approaches, more and more funds are sold to get the cash needed for living expenses.
While other investments deserve a place in one’s portfolio, common stocks, whether purchased outright or through mutual funds, definitely deserve a prominent place for money that won’t be needed for the next 5-10 years.
Disclaimer: This article is not intended to provide financial planning advice, it only provides general investment information. It is not a request to buy or sell stocks or securities. Financial planning advice should be sought from a certified financial planner, who the author is not, and all investment decisions depend on the individual’s situation. All investments involve risk and the reader is urged to carefully consider risk tolerance and seek expert advice if necessary before investing.