Why do people invest in stocks?

Why do people invest in stocks?

Once you have a budget and saved up your emergency savings fund, you will start to have extra savings that go towards your future. Most people put their savings in the bank. Banks usually pay interest on the cash in your account, so if you have $1000 in your savings account and the bank pays you 1% interest, at the end of a year you will have about $1010.

A lot people hope to earn more than what the bank is paying in interest, so they invest in real estate, stocks, bonds, and/or gold. Historically, the stock market has provided the highest return out of all these options. Everyone has different financial goals, but most people invest for their retirement. They want to maintain the same standard of living they could afford while they were working. Just saving your money will not be enough to cover all your expenses in the future.

Return is the amount of profit or interest earned as an income from an investment.

Historical Returns of Investments

While no one knows for sure what will happen in the future, when you compare the different types of investments, you can see which ones have grown the most in the past. Here is a chart of average percentage returns between 1988 to 2018:

Data Source: Portfolio Visualizer.com

From this chart we see that the stock market has performed the best, with an increase between 900% to 1100%, depending on the security types. 

Here is another way to look at it. In this chart, you can see the growth of $100 from 1972 to 2018.

So, would you rather have $401 or $1,612! That is a big difference for just $100. 

If you looked at just one year or even five years, you might not see the same results because the stock market changes a lot. The more time you have to keep the money invested the better it is to invest in stocks.

Summary

You give yourself more time to grow your wealth the earlier you start to save and invest. So you should start saving TODAY to give yourself the most amount of time possible.

Understanding how the stock market works and how to invest is so important because it determines how much your net worth will be when you retire. Are you going to leave you cash in your savings account all your life and have low returns? Or are you going to invest in the stock market and try to earn more?