Why Should I Invest in Stock?
by Carmelo J. Montalbano
Stock investing represents the most effective way to save and invest in order to preserve your purchasing power in the future. Stocks represent the earnings power of large companies, for which an individual can purchase a proportionate share of the company's earning power. Accumulating this earning power is the same thing as accumulating wealth.
Trade the Trend Until It Bends
The Power of Compounding
Stock investing can be viewed as the redeployment of cash savings into more productive means. Stocks, since 1945, have produced returns of about 7 percent per year, according to the Hussman Funds. Bonds return about 4 percent. That 3 percent difference compounded for 20 years represents almost a doubling in the value of bonds, but a quadrupling of the value of stocks. In addition, stocks provide ready liquidity. Stock positions can be sold the next day at the current market quote.
Create Wealth by Reinvesting Dividends
Stock wealth also provides dividends. No all stocks pay dividends. According to the Hussman Funds, about 40 percent of a typical dividend-producing stock's return comes in the form of stock dividends, which is a share of a company's income that is distributed to the shareholders. Dividends provide current income and the ability to reinvest cash for additional stock. An important concept in investing is that the reinvestment of all dividends to spur additional investment is necessary to maximize growth.
Investijng in stocks early in life allows for greater amounts of capital gains and wealth to be reinvested and to grow at a faster rate into the future. Compounding stock wealth to buy more stock is a key to wealth creation.
Asking why you should invest in stocks may be the wrong question to ask as retirement approaches. The real question becomes "Why must I invest?" There is no guarantee that the world will operate in the future as it does today. Accumulating wealth through stock is to invest in the most efficient way known in modern history. Investing in stocks now for the future provides a cushion when preparing for the unknown world 20, 30 or 40 years from now.
There are practical concerns, however, that should be met before investing in stocks. For example, you could increase your rate of saving by reducing the rate of spending. Credit card debt, high interest rate debt, and revolving debt is a detriment to stock investing. Living outside one's means and not conserving maximum capital for the future is foregoing wealth.
Ultimately, investing in stocks is an important means to living one's life as one intends.