Why Invest in Stock?

By Timothy Sexton

  • Overview

    Investing in stock is a time-honored tradition for many people around the world to raise cash or save for a long-term rainy day. The question of why one should invest in stock has answers that deal not only with what your investment goals are, but also why stocks represent a better choice than investment strategies like bonds or real estate.
  • Stock Over Cash

    Placing your life savings into an account in the bank is by far a safer investment strategy if all you are concerned about is not losing what you've already got. Savings accounts cannot return nearly as much on the investment as stocks, however. Even taking into account disastrous crashes, the average ten year investment in a stock portfolio tends to be substantially higher than the return even the most generous bank account will give.
  • Beating Inflation

    Investing in short term bonds is not much better than putting your money into a bank account, and both short and long term bonds are subject to inflation, especially long term bonds. By contrast, the return on stocks has tended to far outpace inflation over the long term. Of course, short term investing in stocks will not likely provide this particular benefit.

  • Dividends

    Many people prefer to invest in stocks by focusing on established companies that provide a dividend. Most dividends are paid quarterly and represent a share in the company's profits. Typically the dividend per share is quite small, often just pennies per year, but it is possible to create a quite substantial bit of easy income by owning large quantities of these stocks.
  • College Tuition

    Over any 18-year period in the history of the New York Stock Exchange the average investor in stocks has witnessed a return on his investment. This is the reason that many people first begin to invest in stocks after the birth of their first child. A very good reason to wisely invest in stocks, meaning re-allocating the strategy as the time to pay for college grows closer, is to make sure there is enough money to cover the rising costs of sending children to college.
  • Retirement

    A great many people first decided to invest in stocks in order to have a nest egg waiting for them when they retire. This strategy works best with a long time frame because the effects of volatility can be offset. When the stock market crashes it also provides an excellent opportunity to buy stocks at bargain prices. Time and again the market has recovered from economic collapse and the overall return has hit record highs.
  • Short Term Investing

    Investing in stocks in the short term is a tricky proposition that carries potentially greater risk than long term investment, but can result in a quick influx of big money if you guess right. If you have the need for cash quickly it is possible to use stocks to accomplish this. Many so-called "day traders" buy and sell stock on a daily or even hourly basis, looking to make small returns on a large chunk of one stock or several different stocks. The return on an individual share of stock may only be ten cents, but if you can make a ten cent return on hundreds of shares or trade quickly enough to get a return of five or six cents through a series of sales per day, the money can add quite substantially in a very short amount of time.
  • Tax Benefits

    Stocks are a terrific investment strategy for tax reasons. Taxes won't come due on stocks until they are sold at which point that famous boogeyman of conservative politicians lurks: capital gains. It also makes more sense to hold stocks for the long term because short term capital gains taxes are higher than long term capital gains.
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