WHY SHOULD WE INVEST IN STOCKS?

Investing in stocks indicates that you have a stake in the firm in which you have invested your money. As the firm expands, you may expect to see a positive return on your investment from the stock. What are some of the advantages of investing in the stock market? Let’s discuss a few points on why should we invest in stocks.

1. Profits from the expansion of the economy.

There is often a correlation between economic growth and stock market performance. When the economy is doing well, the stock market tends to do well as well. There are a number of methods to track economic expansion, but one of the most common is via the gross domestic product (GDP). When GDP rises, firms as a whole produce more and often expand. Growth in company activity often results in higher stock prices.

Increasing investor confidence and a rising stock market tend to go hand in hand since economic growth is reflected in the stock market. When buyers feel confident in the stock market, they are more likely to make a purchase, which may further drive prices upward. If you have money in the stock market and it goes up, you become richer. When people feel secure in their financial situations, they are more likely to make large purchases, such as those seen in stores and online. When consumers spend more money, retailers have the option of making more of the products their store carries and selling them to other customers, resulting in more profits.

2. In order to keep up with inflation.

As defined by the Federal Reserve, inflation is a condition in which prices are rising while the value of money’s buying power is diminishing. It is possible for an economy to have inflation if the total amount of money grows by a significant amount. In general, inflation is not a good situation for the average individual. The stock market’s gains frequently outperform the rate of inflation by a wide margin. For example, since 1913, the long-term inflation rate has been around 3.1 percent every year on average. This contrasts to a stock market return of double-digit percentages every year. Stocks have historically shown to be an effective tool to protect against inflation.

3. Long-term profits or returns 

Long-term returns on stocks have historically been quite high, with annualised returns exceeding 20%. To give an example, the 10-year annualised return for the S&P 500 was 15.43 percent as of the 31st of January in 2022.  That’s a greater rate of return than the annualised rate of inflation on average. It does, however, imply that you should have a longer term perspective in mind. You’ll be able to buy and hold even when the value of the stock dips briefly.

4. Compounding power

Compounding is a process where the interest gained on an investment is reinvested as well as the original investment, allowing the interest become part of the principal. This way, the initial invested money keeps getting greater, and the process of earning continues — on an invested capital that is expanding.

Through the force of compounding, a modest amount of money can increase into a considerable quantity over a time. The longer the time frame, the bigger the value. Compounding will do wonders for your investing gains.

5. You make money through investing.

Money is required to purchase luxuries as well as in all other facets of life. The majority of individuals claim that they do not labour for money, and that a lack of funds is at the basis of most of their issues. Investing, on the other hand, is the answer to this dilemma. Many businesses distribute dividends, or a percentage of their profits, to their shareholders. The vast majority of firms pay quarterly dividends, while some companies are paying monthly dividends as well. Dividend income may be used to augment a person’s wage or retirement income if they invest in stocks wisely.

The only thing you have to do is sit around and do nothing if you put your money into reputable firms. As the firm grows, the value of your money will increase. In the meantime, while your money is increasing on its own, you may utilise your free time to devote your attention to your principal employment or to pursue other interests. You may use this method to make your life more affordable for you, as opposed to your primary employment, where you must labour for money. The fact that it is considered to be one of the top ten reasons to invest in stocks is due to this.

6. Investment in the stock market doesn’t need to be a genius.

Research, risk management, and discipline are the three most important factors in investing and making money in the stock market.

On the research aspect, the ability to analyse data and draw conclusions is essential. Anyone can learn to evaluate fundamentals and make sound executive decisions on stocks with enough devotion.

When managing the risks, it’s important to have a firm grasp on your financial resources, your expected return, and your tolerance for loss. While it’s impossible to win every time, careful risk management can turn a 51% success rate into a little profit.

When it comes to investing, discipline is not letting your emotions get the best of you and sticking to your investing thesis (a convergence of previous research and risk management) when making investments and trades.

Note: If you are new to investing and want to avoid common fallacies and blunders in the stock market, I highly recommend that you to join the stock market course of The Thought Tree and become a pro in investing.

7. Liquidity.

You have the ability to sell your shares on the stock market at any moment. Economists just use term “liquid” to refer to the ability to convert your shares into cash in a short period of time and with little transaction expenses. This is critical if you unexpectedly find yourself in need of money. Because of the volatility of the market, you face the danger of being required to accept a loss. Since the vast majority of equities are traded openly on a major stock market, it is simple to buy and sell them. This makes equities a more liquid investment when compared to other possibilities such as real estate investments, which are more difficult to liquidate on short notice.

8. Tax benefits

Profits realised first from sale of whatever capital assets result in a capital gain on the sale of such assets. This comprises any personal belongings, such as furniture, as well as investments, such as stocks, bonds, and real estate, among other things.

Any gains realised by an investor that sell a securities within one fiscal year of purchasing it are taxed as regular income by the IRS. Short-term capital gains are what are referred to as such. This tax rate might be as high as 37 percent, depending mostly on individual’s adjusted gross income (AGI) and other factors.

Generally, any stocks that are sold after becoming held for even more than a year are considered to have generated long-term capital gains. Profits are taxed at quite a maximum amount of only 20 percent, which is quite favourable. The long-term capital gains tax rate for investors in lower tax categories may even be zero percent for those in lower tax levels.

When it comes to investing in the stock market, there are several tax advantages. Long-term capital gains are taxed at a rate of 10 percent on amounts exceeding Rs 1 lakh. Nonetheless, this is a greater return than the 6.5 percent offered by FDs, which is also subject to a tax of up to 10-30 percent depending on your tax bracket. As a result, the adage “The affluent pay less tax” has become common.

9. Very little cost

Among many people, there is a widespread idea that they must have a large sum of money in order to begin investing in the stock market. That, however, is not the case. With very little money as it takes to purchase a burger, you can get started investing.

One of the most significant advantages of a long-term investing strategy is the ability to save money. Holding the stocks in your portfolio for a longer period of time seems to be more cost-effective than buying and selling them on a regular basis since the longer you retain your assets, the fewer fees you will incur on them. And how much would it all cost in the end?

There are a lot of companies with a market capitalization of less than Rs. 100. You may start earning high returns on your investment with a very little sum of money. Other types of assets, such as gold or real estate, do not have this choice open to them. Additionally, remembering a small portion of anything every day adds up to a significant effect.

You save money on taxes, as we stated in the last section. It is necessary to record any profits made from stock transactions to the Internal Revenue Service (IRS). As a result, your tax burden increases, resulting in you having to pay more money out of pocket. Keep in mind that short-term capital gains might cost you more money than if you retain your assets for a longer length of time, so plan accordingly.

To Conclude…

A number of factors must be taken into consideration while investing in stock market securities. Take into account your age, risk tolerance, and investing objectives, among other factors. Having a firm grasp on all of this might assist you in determining the type of stock portfolio you should construct in order to achieve your objectives. Here’s a broad guideline you may use as a starting point, and you can customise it to fit your own needs:

Select index funds as a starting point. However, unlike stocks, these funds have a cheaper cost and you won’t just had to pick and select which firms to invest in stocks, as you would with mutual funds. Index funds provide returns that are similar to those of the indices they follow.

Take, for example, dividend-paying equities. Such equities can contribute to the growth of your portfolio, especially if dividends are reinvested into the company itself.

Also Read: How to Research Stocks: Complete STEP-BY-STEP Guide

Companies that are experiencing rapid growth might add value to your portfolio. Generally speaking, growth stocks are connected with firms that are able to create much higher revenue at a quicker rate than their competitors. It also means that they are better prepared to generate good profit reports. Choose note, however, that this amount of development comes with a higher risk of falls, so you’ll need to be a bit more experienced than most newbie investors to take this route.

As is often the case, it is advisable to seek the advice of a financial specialist, particularly if you are new to the world of investing. Or if you don’t want to seek advice of financial specialist and want to become an expert by yourself, join a stock market course.

The Thought Tree provides the best stock market course. This course comes with so many advantages. Mainly, you will get to learn each and everything about stocks from basics to advanced level. With learning,  you will simultaneously get the opportunity to practice live trade daily. So, this will help you learn investing and apply it practically in your daily lives. 

You will also be provided with a Demat account for free which is necessary to engage in trading. To join this best stock market course, enrol yourself in the course of The Thought Tree.