Is it a good idea to invest in stock?
In the previous post, I wrote about how the stock market works. A lot of people are terrified of investing in the stock market – it all seems so technical and difficult. However, it can be quite easy. There are apps where you can buy and sell stock with the touch of a button. The question is, is it a good idea to invest in stock?
The short answer is: it depends.
Good returns (long term)
Although investing in stock can be intimidating, they are such a good investment in the long term. The phrase “in the long term” is key here.²
Investing in shares has proven to have better returns than most other assets (again, in the long term). You can make profits from your initial investment by selling the shares at a higher price than you paid for it, or you can receive dividends (share of that company’s profits) on your shares.² A lot of people invest in the stock market intending to save up money for retirement.³
Seeing as the market goes up and down (transitioning between a bear market and bull market, and vice versa) over time, it is good to know when to sell. As discussed last time, a bull market usually lasts longer than bear markets, and cheesy as it is to say, tough times (bear markets) do not last forever.³
This is why it is wise to keep your money put in the stock market even when it looks like things are going south, it usually picks up again. If you panic and pull out your money and sell, then you’re certain to have a loss. But if you wait the market is bound to pick up (although it might take a few months or years) – so then you have a chance to make your money again, or even a profit. This is why it’s important to invest money you can do without for a while – don’t be an idiot and invest money in the stock market that you will need in the coming weeks or months.³
It’s a gamble
Then again, investing in shares is basically gambling. Like gambling, it can either go very wrong, or you can gain a lot of money. It seems like the secret is to have diverse shares (different kinds of companies) and have patience.¹ It’s important to mention that a lot of the wealthiest people in the world are so because of investments in the stock market.²
Again, make sure you don’t need the invested money in the near future because the stock market is a long-term game.¹ Also, you don’t have to invest all your money – I started to invest just R200 a month. It’s not much, but if I keep investing and all the little amounts of shares collect profits, then it adds up, and I can reinvest the profits – but I do my research beforehand as well.
To reiterate, if you’re smart and rational, you will probably buy diverse stock and hold on to it, without paying too much attention to temporary shifts in the market.³
Diversification
The market can be classified by different sectors. These sectors include among others: communication services, energy, information technology, industrials, financials, consumer staples, and health care.²
Some of these sectors are a lot ‘safer’ to invest in than others. For example, consumer staples are something that is always in demand, and therefore a safer bet. However, information technology is ever-evolving, and many products fall out of date very quickly. In this sector, you can lose money if you’re not on top of what is happening, or you can score big time if you can strike it lucky. Thus, you can have safer and riskier investments in your portfolio of stock.²
An easy way to buy diverse shares is to invest in an index fund or exchange-traded fund (EFT). They hold “all of the stocks or investments in that index” – like the S&P500, for example.¹ You can do this diversification on your own, but it will take some time and a lot of research to have success with it. Or you can take the easy way out and invest in an index fund or ETF, where you automatically have diverse shares.³
Diversification also avoids some risks – it comes down to the old saying: ‘don’t put all your eggs in one basket’. If you only invest in one company, you’re screwed when it goes down. If you only invest in one industry, let’s say oil, and that industry takes a knock because of a global pandemic, you’re screwed as well. That’s why it’s important to have shares in many different companies in different sectors of the economy.³
The special ones
There are those traders who like the adrenaline of trading stock regularly to get ahead of the market and make money. These traders want to buy low and sell high, and they try to benefit from short terms drops or booms on the market. However, these traders do a lot of research on the market, and use sophisticated computer programs to analyse the markets – they also often offer these services to the public or individuals, at a price of course.³
The smart people advise you to invest most of your money in the above-mentioned ETFs play it safe. But take a little bit of your investment money, about ten per cent or less, depending on how risky you want to be, and invest it in those stocks that you have ‘a feeling’ about – or rather the riskier capitalist venture stocks.³
To conclude
There are many ways in which you can invest, all with their own risks and rewards: real-estate, buying a business, putting your money in a savings account, and earning interest on it. Investing in stock is just one option, but it can be a lucrative one.
There you have it, I tried my best to answer whether it is a good idea to invest in stock. If I made some factual errors, please let me know (contact details below).
Michelle
P.S. If you’d like to contact me, feel free to comment below, send an email to thatmichelleperson@gmail.com, or follow me on Twitter @M_ClutterBox.
References
- https://www.nerdwallet.com/blog/investing/what-is-the-stock-market/
- https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp
- https://www.nerdwallet.com/blog/investing/stock-market-basics-everything-beginner-investors-know/
