Investing your money is vital if you want to grow your wealth. If you don't invest, your cash will just sit in the bank, earning meagre annual interest rates.
There are various types of investments – stocks, bonds, real estate, currencies. for example – but, stocks are by far the most popular choice of investment. Why should you invest in stocks? Here are three main reasons:
Stocks provide almost all investors with a gateway for investing and growing their cash. In the US, individuals with as little as $1,000 can start investing. This figure varies from country to country, but in recent years, the minimum amount to invest in stocks has only fallen with the introduction of mobile app-only investment platforms.
On the other hand, assets such as real estate require a large amount of cash up-front, excluding many individuals from investing in them.
2. High returns
Like stocks, bonds require minimal upfront capital, with as little as $100 being enough to start investing.
However, where stocks and bonds differ is in their return potential. With bonds, the returns are usually fixed and known before investing in them, making them safe, but low-yielding investments.
For example, US government bonds are currently returning 1-2%/year. By contrast, selecting the right stocks offers the potential for huge returns. An investment in Amazon 5 years ago would have returned ~370% today, trouncing the returns from bonds over the same period.
Liquidity, which refers to how quickly you can buy or sell an asset, is one of the most important but rarely discussed features of stocks. I myself didn’t understand the importance of liquidity before I started professionally working with stocks.
Using real estate as an example helps underline the importance of liquidity. Imagine that you owned a house and wanted to sell this house. The normal process for selling a house requires you to employ a real estate agent, who then places an estimated value on your property before seeking out buyers.
The large amount of money required to buy a house means that they are usually only a few buyers at any given time and you could be stuck waiting for months—or even years!—before a buyer meets your asking price. Of course, if you’re desperate to sell immediately, a buyer might be found, but probably a lot lower to your asking price.
Contrast this with stocks and bonds, which in most instances, can be bought and sold immediately during business days. This might not seem important, but in times of financial stress, having access to assets that you can quickly sell off at market price is vital.
Don’t put all your eggs in one basket
Other investments may share these same qualities, but besides stocks, no other investments contain all 3 characteristics.
But while stocks offer a large amount of upside, there is also the possibility for losing large sums of money in the stock market, more than when investing in bonds and in most cases, real estate.
Due to the risk of investing in stocks, you should never place all your cash in the stock market. However, the accessibility, high returns and liquidity of stocks means that owning stocks should be a vital part of your strategy if you are looking to grow your wealth over time.
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