Investing For Beginners

Investing For Beginners is a series of articles, resources, and other information about basic investments, value investing, quantitative research and other ideas.

Why Invest in Stocks?

Stocks are one of many options available for investing your hard-earned money. Other options such as government treasuries and corporate bonds are less risky, and can provide a regular source of income.  So why invest in stocks?   Here are three reasons ...


Why invest in stocks?  Chalk board showing advantages of holding stocks versus bonds or cash

Stocks are one of many options available for investing your hard-earned money. Other options such as government treasuries and corporate bonds are less risky, and can provide a regular source of income.  So why invest in stocks?  Here are three reasons why you should invest in stocks.

(1) Invest in Stocks to Combat Inflation

"In addition to death and taxes, inflation is another phenomenon that we can expect with near certainty over a period of time."  - Investopedia: Protect yourself from inflation

Did you know that inflation is a key part of our (your) government's economic plan?  Without inflation there is no economic growth, no job creation, and no wealth creation.  The opposite of inflation is of course deflation, which the government and federal reserve would consider to be an economic crisis. With deflation comes job loss, consumer pessimism, recession and if not dealt with in a timely manner, economic depression.

Inflation causes the value of your assets to increase over time, assets such as your house and property. That is the good news. The bad news is that if you don't take precautions, inflation will erode your spending power over time.  Your hard earned cash needs to be put to work, not left sitting in a bank account or stuffed under one's mattress.  Otherwise, when it comes time for retirement,  your money may be worth a fraction of what it is today.

With the current economic environment there are few investment options that will outperform inflation. With interest rates at an all-time low and expected to rise, bonds will likely under-perform.  There are exotic investments such as antique cars, wine, art, and rare coins that may (or may not) perform under current economic conditions.  But for certain, these types of investment are generally not liquid and require a great deal of specialized expertise.  Stocks, on the other hand, are quite a liquid investment and, with a long investment horizon, will generally appreciate over time.  

(2) Invest in Stocks for Capital Growth

For more than a century, owning common stock in a publicly traded company, has been one of the most, if not the most lucrative asset classes to invest in.  Despite higher-than-average volatility, your money can grow in a way that simply isn't possible with bonds, certificates of deposit, or in some cases, even real estate.

Related Terms

Dow Jones Industrial Average since 1900.  Courtesy of StockCharts.

(3) Invest in Stocks for Income

When investors want a steady income stream they usually think of fixed-income securities such as bonds, guaranteed Investment Certificates (GICs), treasuries or perhaps money market funds. However, the near-zero interest rate environment has proven difficult for many income investors. Most have found it challenging to secure meaningful yields from asset classes that were once at the core of income strategies, forcing investors to look to alternative sources for income. Dividend-paying stocks are one alternative that can still be a great way to generate a steady income stream.

The basic strategy for dividend income is to choose relatively mature companies with a history of continuous and increasing dividend payments over time.  One such example is Johnson & Johnson, whose share price has appreciated over 225 times adjusted for splits and dividends since 1985.  

Another method of earning dividend income is to invest in one of the many "dividend achiever" Exchange Traded Funds (ETFs).  ETFs are bought and sold on stock market exchanges in the same fashion as stocks.  They have the added advantage of professional management and diversification for lower risk. A complete list of dividend ETFs can be found at etfdb.com Top 100 Highest Dividend Yield ETFs.

Summary of 'Why Invest In Stocks'

There you have it.  The three reasons why you should invest in stocks are:  (1) to beat inflation; (2) for capital appreciation; and (3) for income. 

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