Why Invest in Stocks?

Fear of stock market volatility often holds investors back. However, historically, investing in stocks has been an essential tool in building wealth and can serve as an important part of a diversified portfolio. Today we're exploring why investing in the stock market matters.

Reasons Why to Invest in Stocks

Stock owners share profits and other perks.

Your percentage of ownership in a company represents your share of the risks taken and profits generated by the company. If the company does well, your share of the earnings will be proportionate to how much of the company's stock you own. The reverse is also true. Your share of any loss will be similarly proportionate to your percentage of ownership. However, you are not personally financially responsible for any share of the liabilities. In addition, depending on the company and the types of shares you have, stock ownership could carry other benefits. For example, you may be entitled to dividend payments, capital gains payouts, voting rights, and other corporate privileges.

Why invest in stocks?

Fear of investing has kept many on the sidelines, especially after the 2008-2009 recession. In fact, many investors never venture beyond the world of cash alternatives (e.g., bank accounts, CDs, and money market accounts). They take comfort in knowing that these investment vehicles provide relative safety and liquidity that allows them to access their money easily if needed.

While these investments may not be very volatile, they hold a different risk type. They generally yield minimal returns and may not even keep pace with inflation. That means that over time, the investor has less buying power. At some point, most investors want the potential for higher returns, which is where stocks enter the picture.

A variety of factors motivate people to invest in stocks. Many view stocks as an opportunity to accumulate wealth or to prevent inflation from eventually reducing their purchasing power. They generally take a long-term view, hoping their stocks will increase in value over time.

Investors may also be interested in income through the dividends that some stocks pay, which shareholders may accept in cash or (in some cases) reinvest in additional shares of the company. Dividends and any increases or drops in the stock's price combine to produce the stock's total return.

The thrill of playing the market may attract investors with a gambler mentality. They may trade actively, sometimes buying and selling the same issue within a few days or hours. These day traders try to take advantage of small, intra-day price movements in volatile stocks or indexes.