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Chapter 2, September 4
They provide the highest potential returns.
Stocks are, in essence, partial ownership rights in the company that entitle the stockholder to share in the earnings that may occur and accrue. Some of these earnings may be paid out immediately in the form of dividends, while the rest of the earnings will be retained. These retained earnings may be used to expand operations or build a larger infrastructure, giving the company the ability to generate even greater future earnings.
Here is a macro view of the long-term performance of various asset classes. Obviously stocks performed the best in the long run.
Source: “Stocks for the long run” by Jeremy Siegel
There are periods of bad performance. But overall, stocks have formed a steady march upwards as the U.S. and global economies have grown.
They are easy to invest
Stocks are often called “liquid assets”, which means they can be turned into cash relatively quickly. For example, if you had $1,000,000 invested in the market at 3 pm on a Tuesday and you wanted to get all your money out right away, you could most likely turn that million dollars into cash in a few minutes with just a few clicks.
A lot of people invest in stocks because they feel like their money is never far away and can always be called home in an instant.
Invest in stocks to have fun
You get to learn about the stock market, and how companies work, what makes them succeed or fail, how products come to market, how economies impact companies, and make important decisions that can have a huge impact on your financial future.
Along the way, you will find it enjoyable with a greater understanding of how the world works.
An Apple fan would definitely say so: Investing in great companies you admire could be fun!
If you have never invested in stocks, it seems irrational to jump blindly into stock markets! People lose money in the markets because they simply jump to the market without understanding the economic and investment market cycles. You should invest in the stock market after getting the basic knowledge about it and in accordance with your financial goals.
For those who have never invested before,
Here are examples of money that would be much better off in a high-yield savings account than stocks:
- Your emergency fund
- The money you’ll need to make your child’s next tuition payment
- Next year’s vacation fund
- The money you’re socking away for a down payment, even if you will not be prepared to buy a home for several years
For those who are already investing,
Here are some important concepts to consider before choosing your stocks:
- Diversify your portfolio
- Invest only in businesses you understand
- Avoid high-volatility stocks until you get the hang of investing, and always avoid penny stocks
- Learn the basic metrics and concepts used to evaluate stocks
“Never put all your eggs in one basket.”