Is it Worth Investing in Stocks?

Stock yields are always higher than some other conservative investment options like bonds and mutual funds.

Investing in stocks is a high risk-reward strategy. If you are willing to take that risk, it’s always worth investing in stocks for the long term.

How Stocks Have Performed Historically?

The stock market has seen an upwards trend historically as compared to other types of investments. If you look at the long-term returns of individual stocks and popular indices like the S&P500, you’ll verify the trend.

For context, Apple’s stock price was below the $1 mark at $0.98 for the year ended 2004. Today, its price is $142.37 (down from the year-high of $180).

The annual average return for Apple stock for the last 20 years remains at 38.25% and for the last 10 years at 21.39%.

Similarly, one of the most popular indices S&P500 performed well over the last decade as its average return stands at 9.75%.

Overall, the stock market has gained 10.32% since the global financial crunch (GFC) of 2008. It is significantly higher than other conservative investments like bonds which stand at 5.79% for the same period.

Why You Should Invest in Stocks?

Investing in stocks comes with specific benefits and risks.

Higher Return

As mentioned above, stocks are highly lucrative investments as they offer higher returns as compared to other instruments.

Stocks are highly risky too. That's the prime reason why investors look for higher returns to offset the higher risk.

Higher Liquidity

Stocks come with higher liquidity. It's easier to trade stocks of a publicly listed company through an online broker than to buy or sell other investments like a real estate property.

Hedge Against Inflation

Investing in stocks provides a natural hedge against inflation. As the inflation rates increase, the stock prices appreciate too.

Historically, stocks have stayed at par with the inflation rates if not exceeded them around the world.

Dividend Income

If you are looking for passive income or a stable and consistent income stream, you can invest in dividend stocks.

Dividend stocks come from companies with established histories. Dividend stocks are backed by strong financial statements usually.

Build Wealth

If you are investing in stocks, chances are you’ve spared that amount from regular expenses. Reinvesting your gains from stocks can help you build wealth in the long run.

Particularly, reinvesting dividend income can quickly compound your earnings.

Diversify Your Investment Portfolio

Even when you look to invest in conservative instruments like bonds, stocks are your best options to diversify the portfolio.

Investing in individual stocks or indices can help you build a strong and diversified investment portfolio to help you accumulate wealth in the long term.

What are the Risks of Investing in Stocks?

Investors require higher returns from stocks because these are risky investments. In practice, investing in stocks absorbs the inherent risks that come with them.

All types of stocks face certain risks like interest rate risks, inflation risks, rating risks, and legislative risks.

Then, there are a few broader categories of risks that you should consider before investing in stocks.

Volatility

The volatility factor makes stocks the riskiest investment as well as lucrative one at the same time. If you expect to earn higher returns due to the higher volatility of stocks, you should be ready to lose as much too.

Returns are Not Guaranteed

Even though stocks generate a higher return on investment in the long term, there are no guarantees for these returns.

The high ROIs of stocks often come from a few top global companies. Therefore, generalizing these returns for every investor is practically impossible.

Risk of Losing it All

You don’t need to be an expert to make good fortunes through stock investments but if you don’t do the homework, you may lose it all.

Stock investments require careful planning and timely execution of these plans. If you don’t prepare well, you are risking what’s in hand.

It’s a Long-Term Plan

One of the key points missed by many investors is to think of stock investments as a short-term approach. You can earn profits through day trading but it’s a long-term game anyway.

You can only reap rewards from stock investing if you’re planning for the long-term and steadily invest with patience.

Is it the Right Time to Invest in Stocks?

The last couple of years has been hard for all types of investments including stocks. Although some individual stocks and specific sectors like tech and pharmaceutical did well during the Covid-19 meltdown.

Leading stock indices like the NASDAQ and S&P500 have fallen through the year 2022 due to fears of an upcoming recession in the US market and the FED’s response with increased interest rates to curb the soaring inflation rate.

However, as the historic trends suggest, the stock market slumps always rebound. Therefore, you should plan for the long-term with stock investments if you’re thinking to invest right now.