Investing in stocks means purchasing shares of ownership in a public company. If the company performs well, you make money. But of course, there’s also the risk of losing money if the company does not perform as expected.
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That said, some people still give the stock market a chance. Warren Buffett built his empire and made billions through stock ownership, but this doesn’t seem to be a common financial strategy among Americans.
According to a recent GOBankingRates survey, almost half of the survey’s participants reported not owning any stocks, with 22% having less than $15,000 in total stock investments. Only around 17% of those surveyed said they have more than $35,000 invested.
While investing in stocks could carry some risks, it can also be a smart financial move that shouldn’t be overlooked.Here are five reasons you should consider dipping your toes in the stock market.
Potential for Growth
One of the primary reasons people invest in stocks is the potential for capital appreciation.
“It’s the allure of buying a stock at a lower price and selling it at a higher price that attracts many to the stock market,” said Certified Financial Planner (CFP) Taylor Kovar, CEO and founder of Kovar Wealth Management.
“Over the long term, stocks have typically outperformed other investment vehicles like bonds or savings accounts,” he added.
While the stock market has its ups and downs, historically, it has trended upwards, with an average stock market return of the S&P 500 being around 10% annually — approximately 7% when adjusted for inflation. So, let’s say you invest $1,000 in the stock market today and add $100 to your portfolio each month. You can expect a total balance of $83,000 after 20 years.
That said, there are no guarantees in the stock market, so always perform your due diligence, diversify your portfolio and consult a financial advisor before making any investment decisions.
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Dividend Income
Another compelling reason to invest in stocks is the opportunity to earn dividend income.
When a company generates profits, it may decide to share a portion of these revenues with its shareholders in the form of dividends. These payments, typically made on a quarterly or monthly basis, can provide a consistent income stream, especially in times when the market is volatile or stagnant.
“Over time, these dividends can significantly boost the total return of an investment, and they can be reinvested to purchase more shares, creating a compounding effect,” said Kovar.
Depending on your portfolio size and the dividend yield of the stock you invest in, you could earn hundreds or even thousands each year passively through dividends.
If you’re interested in generating consistent income through this method, consider looking into some of the best monthly dividend stocks like Main Street Capital Corp., Realty Income Corp., SL Green Realty Corp. and EPR Properties.
Diversification and Risk Mitigation
Diversification means not putting all your eggs in one basket. By spreading your hard-earned cash across different types of assets, you limit your exposure to market volatility. Stocks, in particular, offer a level of diversification that can help maintain and grow your wealth over the long term.
With so many ways to diversify your stock portfolio, including investments in large, medium and small-cap companies, as well as domestic or international markets and industry sectors, you can tailor your investment approach to your personal goals and financial needs while minimizing risk.
While there’s no one-size-fits-all approach, many financial experts recommend buying at least 20 to 25 stocks across various industries to build a diversified portfolio.
Check out our list of the top stocks to buy if you need help narrowing down your options.
Some Protection Against Inflation
Putting your money in stocks instead of leaving it in your checking account could be a practical strategy to stay ahead of inflation.
Over time, the purchasing power of money tends to decrease due to inflation, but stocks have historically provided long-term returns that exceed the inflation rate. This means your wealth grows not only in nominal terms but also in real terms, preserving your buying power.
However, it’s important to note that no investments are 100% inflation-proof. While returns on stocks beat inflation over the long run, the short-term volatility of stocks during inflationary times could be difficult to stomach.
So, don’t dump all your hard-earned cash into the stock market. Consider putting some in high-yield savings accounts or purchasing other assets like bonds, ETFs and gold.
Tax Advantages
If you own stocks in a tax-advantaged account like a traditional IRA or 401(k), you don’t have to pay taxes on dividends or stock sales as long as your investments remain in the account.
Plus, since your contributions are tax-deductible today, purchasing stocks through a traditional IRA or 401(k) allows you to reduce your taxable income, potentially saving you a significant amount of money if you’re in a higher tax bracket.
Purchasing stocks through a Roth IRA offers tax advantages as well. With a Roth IRA, your contributions are made with after-tax dollars and are not tax-deductible. However, your investments get to grow tax-free since you won’t be taxed again upon withdrawal.
Though investing in stocks through retirement savings accounts can offer tax advantages, you could be subject to hefty early withdrawal penalties if you take the money out before a certain age. So, make sure you won’t need the money in the short term before investing it.
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This article originally appeared on GOBankingRates.com: Nearly Half of Americans Don’t Own Any Stocks — 5 Reasons To Start Now
