Investing in the stock market means that you own part of the company in which you buy shares. As the business grows, you can expect the stock to generate returns on your investment. If you have savings and want to take advantage of them, investing in the stock market might be a good idea.
How does investing in the stock market work?
Investing in the stock market is the purchase of shares in a public company. These small shares are known as company shares and by investing in these shares you are hoping that the company will grow and perform well in the future. When this happens, your stock will usually rise in price. Therefore, some investors may buy them from you for more than what you paid in the beginning. This means that you will be able to make a profit if you decide to sell them.
Why is it important to invest in the stock market?
Investing in the stock market is much easier than most people think. The security, profitability, liquidity and flexibility of the stock exchange is far greater than any other type of asset:
- Get a higher return: The main reason most people invest in stocks is the potential return compared to alternatives such as bank certificates of deposit, gold, and treasury bills. For example, the average stock market return since 1926 has been about 10% per year; the yield on long-term government bonds over the same period was 5-6% per annum.
- Protect Your Assets from Inflation: Stock market returns often far outweigh the rate of inflation. For example, the long-term inflation rate has been around 3.1% per year since 1913. This compares to double-digit annual returns on stocks. Stocks were a good way to hedge against inflation.
- Receive regular passive income: Many companies pay dividends to investors or a portion of their profits. Most companies pay dividends quarterly, although some companies pay monthly dividends. Dividend income can help supplement an investor’s salary or retirement income.
- Pride of Ownership: Shareholding represents fractional ownership of a business. You may own a small share of a company whose products or services you like.
- Liquidity: Most stocks are publicly traded on major exchanges, making them easy to buy and sell. It also makes stocks a more liquid investment compared to other options such as real estate investments that you can’t sell quickly.
The best investments in the stock market
Investing always comes with risk, but in these sectors your money is more likely to grow. Because historically these are the industries that bring the best results.
- Health care: a critical sector that is not as prone to crises and recessions as the rest.
- Technology: The consumption of data in the world’s most important companies has made investing in technology a great idea.
- Discretionary Consumption: Includes luxury goods and services or those designed for pleasure and entertainment, such as Netflix, Disney+ or Starbucks.