We are often reminded not to 'put all our eggs in the one basket.' Many small business owners like myself may wonder if there is any value in investing in the stock market as a way of diversifying our income. Agnes has written this article to help demystify the stock market for us but, as always, you should seek financial advice from a trusted professional before committing to a new investment.
Written in collaboration with Agnes Benefiel
Among the many investment opportunities out there, the stock market is one of the easiest and most profitable options to help build wealth over the long-term. In fact, most of the individuals in the list of the wealthiest Australians as featured by Forbes, such as commodities investor Ivan Glasenberg, have accumulated such wealth due to a large percentage of shares in public and private corporations.
Using both traditional and innovative techniques, there are several ways to make money through stocks. FXCM's post on 'How to make money in the stock market?' cited a few key strategies to earn a ROI (return of investment) through purchasing, ownership, and sale of stocks on the stock market
• Growth Stocks
• Initial Public Offerings
• Value Stocks
• Income Stocks
• Stock Funds
• Stock Splits
Just like any other financial asset, investing in stocks comes with potential risks and losses. But, investors can improve their chances by familiarising themselves with the many different ways to invest and find what that suits their needs and long and short-term goals.
Additionally, there are many reasons why investing in stocks can be lucrative, such as helping you to save for your retirement. Read on below to see why you should invest your money in the stock market.
Ride out the stock market drops easily
Unlike other financial assets, investing in stocks makes it easy for investors to cut losses and focus on generating revenue. If the market drops, investors should not be worried. It may be painful for a time, but even if the market suffers over a long period, you should be able to ride it out. Stocks are long term investments, so owners can recover from the worst historical declines in the stock market easier that you’d imagine. As long as you are willing to stay the course, stocks will be able to offer the most growth potential. You may even be in a better position for growth when the market recovers.
Most potential for growth
Even with the regular ups and downs in the market, Australian stocks have consistently earned more than bonds over the long term. Of course, it wasn’t all steady upward growth, but it presents the performance of the stock market historically that shows its greater potential for growth over a long period. Thus, investing in stocks, mutual funds, or exchange-traded funds (ETFs) are considered vital when saving for retirement or other long-term goals. The Sydney Morning Herald said investing in Australian stock offers growth potential for investors for several reasons. These include if businesses are expanding globally, a new economic infrastructure is poised for transformation, technological disruption, a new export economy, and changing demographics, according to author Mark Mulligan.
The key to overcoming the volatility of stocks is by diversifying the investment opportunities to ensure growth. While you may still have some bonds and other less risky options (i.e money market accounts), you definitely do not want to put all your money in one place. Asset allocation in stocks will allow investors to balance risk and reward by assigning assets based on their own goals, risk tolerance, and horizon. This strategy can even help you in gaining international stocks where it can be between 5% for conservative investors to 25% for aggressive ones . Here are the reasons why international stocks are beneficial to your portfolio:
• Potential for higher rates of growth abroad
• International stocks are becoming a larger share of the investment universe
• Potential to lower overall risk in your portfolio
• Multiple currencies can provide an added layer of diversification
Despite the economic turmoil at present, the benefits of investing in the stock market have not changed. What needs to be changed is the perception of people about investing in stocks and its associated risk. In particular, Jason Murphy of news.com.au said millennials should invest in the stock market as they have the luxury of time to build their portfolios. As the famous stock investment quote goes: ‘Time in the market beats timing the market.’