Why Is It Important to Invest in Stocks?

Benefits of investing in stocks

1. The potential to earn higher returns

 The primary reason most people invest in stocks is the potential return compared to alternatives such as bank certificates of deposit, gold, and Treasury bonds. For example, the average stock market return has been about 10% annually since 1926; long-term government bonds have returned 5% to 6% annually during the same period.

2. The ability to protect your wealth from inflation

 Stock market's returns often significantly outpace the rate of inflation. For example, the long-term inflation rate has run about 3.1% annually since 1913. That compares to a double-digit annual return from stocks. Stocks have been a good way to hedge against inflation.

3. The ability to earn regular passive income

 Many companies pay dividends, or a portion of their profits, to investors. The majority make quarterly dividend payments, although some companies pay monthly dividends. Dividend income can help supplement an investor's paycheck or retirement income.

4. The pride of ownership

 A share of stock represents fractional ownership of a company. You can own a tiny slice of a company whose products or services you love.

5. Liquidity

 Most stocks trade publicly on a major stock exchange, making it easy to buy and sell them. It also makes stocks a more liquid investment compared to other options such as real estate investments that you can't quickly sell.

6. Diversification

 You can easily build a diversified portfolio across many industries through stocks. That can help you diversify your overall investment portfolio, which could also include real estate, bonds, and cryptocurrency, reducing your overall risk profile while improving returns. 

7. The ability to start small

 Thanks to $0 commissions and the ability to buy fractional shares with many online brokers, investors can begin purchasing stocks with less than $100.

 Risks of investing in stocks

 Now that we've covered the benefits of investing in stocks, we'll look at some drawbacks. The biggest risk of investing in stocks is stock market volatility. On average, the stock market declines 10% from its high about every 11 months, 20% around every four years, and more than 30% at least once per decade. Because of that volatility, investing in stocks isn't for everyone.

•  You can't stomach the thought of a 10% (or greater) decline in your investment.
•  You'll need the money within the next three to five years for a down payment on a house or      some other large planned purchase.
•  You're retired or nearing retirement and need a fixed income stream more than the capital appreciation potential offered by stocks.

 Beyond volatility-related concerns, there are other reasons to avoid stocks:

•  You have a lot of high-interest rate debt, like credit card debt. Paying off this debt can often yield higher returns than buying stocks.
•  You don't have an adequate emergency fund. Having enough cash on hand to cover an emergency expense can prevent you from needing to borrow money with a credit card.
•  You don't have the time or desire to research stocks to buy.