Benefits of Investing in the Stock Market

A stock market is a market where stocks are bought and sold. Stocks are small pieces of a company. Hundreds of thousands of shares of stock are traded each day in stock markets all around the world.

An investment is the purchase of an item in hopes that it will retain or even increase its value. An investment can be the purchase of a house or buying gold or fine bottles of wine. By investing in the stock market, you are actually purchasing parts of a company.

Inflation is when prices of items such as food go up. Purchasing stocks offers investors the chance to beat inflation. This can happen because the price of a stock may go up faster than inflation. Suppose you buy a stock for $100. Next year the price of the stock has gone up to $110. You then sell the stock. You have made a 10 percent rate of return. During that year the inflation rate has gone up by three percent. This means that it takes an additional three dollars to buy goods that formerly cost $100. By investing in the stock that went up by 10 percent, your one $100 investment has outpaced the rate of inflation.

Another benefit of the stock market is the ability to diversify. Diversification means the opportunity to buy various stocks in various industries. An investor might buy stocks in a medical equipment supply company, a supermarket, a bank and a company that produces movies. His portfolio (collection of stocks) thus consists of stocks in the medical, retail, banking and entertainment industries. If an industry has problems, stocks in that industry might fare poorly, while another industry has a very good year. Stocks invested in that industry may do well. A diversified portfolio will allow an investor to avoid putting all his money in a single industry. This will decrease the chance of losing money and increase the chance of making it.

One of biggest advantages of investing in the stock market is the potential for large returns. A stock may increase enormously in value in a short period of time. Investors can sell their stocks any time they choose. This means they can take advantage of a rising stock price and potentially make lots of money.

An investor does not need large amounts of money to get started investing in the stock market. Many small brokerage houses (places where stocks are bought and sold) will allow buyers to invest in the stock market with as little as a thousand dollars. Some employers will allow their workers to allocate a little bit money from their paychecks each month into a brokerage account. Some employers will even match any money deposited into an account as part of an employee's benefits.