Is it better to invest $100 in the stock market or to put $100 in a savings account?
Most people feel safer with a savings account simply because they understand a savings account better than the stock market. Besides, the Federal Deposit Insurance Corporation (FDIC) protects the money people put in savings accounts, so they feel their savings are safe.
In addition, people worry that if the market drops, their stocks will lose value.
While that might happen, it’s also true that over the long term, the markets recover and investors recoup their losses. On the other hand, savings may be safe in the bank, but don’t offer any protection against inflation. Money in the bank earns a low interest rate, much lower than the stock market yields over time. And when you factor in the ravages of inflation, savings lose a lot of buying power over time.
Why monthly investments create wealth
The secret to monthly stock investments is compounding returns. Compounding returns come down to earning on top of earnings – it begins small, but the dividends you earn have a snowball effect over time, getting larger as time goes by.
Compound returns are earned when the interest you earn is also invested. So, your initial investment of say $100 at a compound interest rate of 10%, will be $110 at the end of the next year when you invest it again.
Therefore, even if you don’t make any additional deposits, your earnings will increase and you can build substantial investment growth over time.
Benefits of investing monthly
Earnings
The obvious benefit of investing directly in the stock exchange is the potential to increase your earnings. Historically, the stock markets have always recovered and yielded a good return in the long run. Although individual stock prices fluctuate constantly, they yield positive returns over time. Over several decades, the average stock market return has been about 10% per year.
Investing in equities (such as stocks or mutual funds) is the best investment option if you have a time frame of several decades. As for companies to invest in, it’s sensible to choose companies that show steady growth and good earnings.
Dividend income
Investors can also earn dividends on their investments. Dividends are an additional income for investors, which are mostly paid out to them on a quarterly basis. Dividends represent a portion of the company’s profits. Keep in mind that not all companies pay dividends.
They can choose to do other things with their profits like reinvesting it in the business. Dividend payments are even possible if the stock has lost value.
Protection against inflation
Protection against inflation is another prime benefit of investments. Inflation is a natural facet of the market economy. The level of inflation varies according to events such as an increase in commodity prices and current events like the pandemic.
Investing intelligently in the market is a strategy that can hedge against inflation. It is possible to invest in asset classes that traditionally outperform the market in times of inflation. When investing, check that the rate of return on investment will be higher than inflation.
Liquidity
Liquidity refers to the ease with which a particular asset can be converted into cash.
All investments can be turned into cash, but some more easily than others. For instance, investments like real estate are not very liquid as real estate can take weeks or months to exchange for cash.
While classed as non-cash assets, stocks and bonds can be converted to or exchanged for cash in a relatively short time, often in just a few business days, depending on market demand for the assets to be converted.
When the daily volume of transactions on the stock market is high, it’s an indication that there are many active buyers and sellers.
Liquidity is important in investing. If all of an investor’s assets are tied up in long-term investments or property, it will be impossible to take timely advantage of new investment opportunities.
Investment flexibility
Anybody can start investing – contrary to popular belief, the stock exchange is not only for the wealthy. You don’t have to wait until you have thousands of dollars in the bank; you can start investing with small amounts – some popular investment apps even allow investors to start with a nil balance. Investing in stocks is not limited to lump sum investments.
Also, you don’t have to invest the same amount every month. All investors can buy stocks when and how they can afford them.
You can start investing any time, but the sooner, the better. You can adapt your investments to your changing circumstances and needs and top-up your investments when you have extra funds available.
Some asset management groups will allow you to switch between their trusts at any time. Best of all? If you learn of a new opportunity, you can make changes to your investment portfolio.
Reap the benefits of a healthy economy
In a booming economy, companies are more profitable, making them a more attractive investment prospect as their stocks become more valuable.
In a booming economy, there is increased commercial activity, consumer confidence grows, and average income increases, which leads to increased consumer demand, and higher sales. In the stock market, an economic boom is associated with an opportunity for stock market investors to take direct advantage of the favorable circumstances when the value of their investments increase as well.
Provide a regular income
With proper planning, investors can benefit from a diversified portfolio, which can provide a regular income for their retirement or supplement their income.
There’s a range of investments that investors can choose from to provide them with a regular income, including investing in dividend-paying stocks and mutual funds that are set up to provide a monthly income.
Regulatory protection
The US has two main stock exchanges that make up the stock market of the United States. They are the New York Stock Exchange (NYSE) and the Nasdaq. Several other smaller exchanges are also part of the US stock market.
The US stock market is regulated by the Securities and Exchange Commission (SEC) and specific local regulatory bodies.
The SEC and other regulatory bodies enforce fair pricing practices and transparent transactions, so investors’ investments are protected and fraudulent activities are minimized.
Investing has become easier and more accessible
The emergence of online brokerage platforms has done away with fixed broker costs and made a complicated issue more understandable and accessible.
These days, investors don’t have to call their broker and depend on their knowledge of stocks and the market. Individuals can leverage a plethora of online resources to judge for themselves what to invest in and they can execute orders on their own.
Some platforms provide information about current stock prices, the latest financial news, and company documents, including financial statements prospectuses and reports.
For those who don’t have the time or the inclination to study the market and companies to invest in, there are robo-advisors that provide automated, algorithmic investment services and don’t require significant management and commission fees. Currently, there are more than a hundred robo-advisors managing $224 billion in investments.
Then there are the investment apps that investors can use to buy and sell stocks and manage their investment portfolio on their mobile phone.
Final thoughts
Making monthly investments in the stock market is a sound strategy that yields financial benefits over the long term. Even a small amount invested over many years will yield a positive return. But investing is not a short-term game. The longer you stay in the market, the better your chances of creating wealth for yourself.
A diversified portfolio will limit your risks, and allow to you stay ahead of inflation. And it’s worth it to investigate the many options that technology has created for all people to benefit from the stock market.
