If you are new to investing, the stock market can seem like a confusing and intimidating place to put your money. At a first glance, it might seem to make sense to avoid this havoc and just put your money in the safety of a bank account or government bonds. However, if you aren’t investing in the stock market, you are missing out on one of the most lucrative places to put your money. Here are some of the top reasons why you should consider putting some of your money into the stock market.
Stocks are risky assets. This means that they don’t guarantee a rate of return and can even lose money any given year. However, while stocks sometimes lose money, their long-term performance is undeniably positive. Over the past 50 years, the stock market has earned an average return of 10% per year, according to the Federal Reserve. Over this same time period, a guaranteed investment like government bonds only returned 5% per year, barely enough to keep up with inflation. If you are going to grow your savings to reach your financial goals, you need to invest in a high return asset like stocks.
Taxes are a major drag on your investment return. When your investments earn income, like interest payments from bonds or rental income from investment properties, you need to report this money as taxable income right away. This raises your tax bill for the year and leaves you with less money for investing. Stocks, on the other hand, can delay the taxes on your gains. If a stock price goes up, your total portfolio becomes more valuable. However, you don’t need to report that growth as income until you eventually sell the stock. This can push off your tax bill for years.
In addition, when you sell a stock for a gain, it is taxed as a capital gain and not as income. As long as you owned your stock for at least one year, the gain is considered a long-term gain. The current long-term gain tax rate in the United States is 15%. The income earned from your other investments is taxed at your personal income tax rate. By investing in stocks, you pay a lower tax rate on your gains.
Stocks are also liquid investments. This means that they are quick and easy to turn into cash. If you need some extra money, you can sell off some stock right away. You’ll only need to pay a small brokerage fee and you’ll get your money within a few days. Other investments are not nearly as liquid. If you invested your savings into rental properties instead, your money is locked up. Converting these assets into cash is a long and expensive process. When your money is in the stock market, you won’t have this problem.
The stock market isn't perfect. Many greedy and irresponsible investors have lost money in stocks. However, if you learn how to be a disciplined, smart, and responsible investor, you’ll be able to make the most out of the stock market’s many advantages.
About the Guest Author
Patrik Fonce is a writer and works currently at QuantShare Trading Software.
Tuesday, October 23, 2012
Why Invest in the Stock Market?
Posted by pfstock at 6:34 AM
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My reason is to make money :-)ReplyDelete
Sure, this should be the main reason in investing in stocks.ReplyDelete
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