Why invest in stocks

Author: Steven posted in Investing basics tagged with Investing 101, Stock market

Buying stocks is fascinating because it allows even the small investor to become a part owner of a business and has historically proven to be an investment vehicle with a high potential rate of return. If we consider other investment vehicles such as government bonds or cash equivalents like money market funds, they have simply not kept up with the rate of inflation. While stocks have historically returned more than the inflation rate.

Although stocks provide the highest potential returns, they also come with a higher level of risk because of their volatility. In the short-­term the price of a stock can decline substantially but you can reduce the volatility risk of stocks by making a long­-term commitment to investing in stocks. This will not guarantee a positive return on your investment because if you choose the wrong stocks you can lose all your money but it can help reduce the amount of risk involved. This is why adopting a long-­term approach is one of the key factors in becoming a successful investor.

Another important point to remember is to never put all your eggs in one basket. There’s no doubt that if you invest in the right stock you can make a lot of money but at the same time what is a “right stock” and how do you select that stock now? It is easy to say after the fact which stock was the most profitable but you have to pick the stock that will be the most profitable in the future. We can analyze the past performance of a company but that doesn’t mean the company will continue to do well in the future. Even big companies can file for bankruptcy. Always do your homework before buying stocks and establish a diversified portfolio which will reduce the risk of your portfolio compared to a concentrated portfolio.

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