The possibilities to let your money work for you are endless. I myself prefer to invest in stocks for different reasons. One is, it’s great for professionals and quite easy for small investors.
I prefer to invest in stocks. I do it for more than 25 years now. But being an investor could mean a lot more, i.e. investingin real estate, in precious metals, in funds, in cars, in start-ups and so on.
If I tell people that I’m an investor, one think I constantly buy and sell stocks the other ask me for an investment in whatever they sell. Most of the times I reject the offers although knowing people would be disappointed. Especially young entrepreneurs who need money to start their business. But I’m no angel investor.
To be honest, I have to say that I also own real estate. Just because I love real estate. And the rent is a nice passive income. Additionally I can save taxes. My wife owns some gold, too. I’m not sure why, but if she wants to, I’m fine with it. But first of all I love to invest in stocks or as I’d rather say – in companies.
Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it. (Peter Lynch)
Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes. (John C. Bogle)
Well, certainly I love the stock market. I always had a passion for it. Since I was 15 years old, the stock market fascinated me. But investing in stocks or companies has a lot practical reasons, too. I didn’t know back then, but I know today.
But before I tell you the advantages of stock investment for the average small investor, I will start by talking about the disadvantages of some other investment possibilities.
Let’s begin with real estate. Many people invest in real estate and you can make a lot of money doing so. I myself own some property myself. Real estate is great if you like to gain passive income and also for tax reasons, at least in Germany. Maybe it’s similar in your country. But if you did not inherit a property, it may not as great as it looks.
If you want to own a house, you need cash, a lot of cash. The most small investors don’t have that much. That’s why investing in real estate isn’t the right thing for many of them. If they want to do it nevertheless, they need a loan. I’m not of the opinion that debt is a bad thing, but one has to be careful with it. In Germany, buying a house with debt and renting it, is quite lucrative. And in the moment, with interest rates near zero, it is nearly a no-brainer. But you have to consider that times are changing. Interest rates will increase sometime.
What if you find nobody who wants to rent your home. Then no money comes in, but nevertheless you have to pay the mortgage. That could cause you trouble. The more if you lose your job. Then you may have to sell the house which could take some time, during which mortgage has still to be payed. Also property tax and different insurances. And when the market’s down like 2008 and following, it could really be hard.
And don’t forget that a property has considerable maintenance costs. Things broke down and have to be repaired. When tenants change you have to renovate and so on. It’s a lot of money you have to have available quickly. Money you can’t invest with a reasonable return, because it is stored in a savings account.
Living in your own house is not a great investment
Here in Germany, many think owning a property and living in it, is a great investment. I’m not sure if they’re right. Well, if you like to life in your own house, it’s okay. But thinking, it’s a great investment is different. Interests rates makes the house much more expensive at the end. Tax and insurance cuts the return. Maintenance costs can’t cut the tax. Mortgage has to be payed from your income and if repair could be really expensive. think of new windows or a new roof etc.
Precious metals like gold, silver etc. is something many people love. I don’t love gold. Gold is nothing but a piece of metal which gets its value from the psychology of people. If people are scary about the economic and political future, they go into gold. If they aren’t, they sell it. Gold price depends on the emotions of the market participants. It does not earn any money. It makes nothing which leads to an increase of value.
Commodities like raw materials, basic resources, or agricultural products are very risky and in my opinion only something for professionals.
The same applies to financial derivatives. Although you can make a lot of money, you also can lose everything. And the most will. You need a lot of experience and you have to deal with losses to have a chance to be successful. But I don’t think, small investors could make a fortune with it.
Besides, you have to be active all of the time. You always have to buy and sell like day traders. The most small investors don’t have that much time. But what’s more important is that you have to pay a fee for each transaction. Money which cuts your return.
Mutual funds and bonds
Mutual funds take fees, too. And you don’t know if the one you choose will increase your money. Most fund managers don’t beat the market which is not only because they’re lousy investors, but because of investment rules they have to follow. It’s quite difficult to make a decent return with all the restrictions. But you will find busy investors, too. Way too many. And they also have to be payed for their work. I think, finding the right fund manager is as difficult, if not even more, as finding the right stock.
Bonds are attractive for many small investors because they’re relatively secure. But at the moment, the return is anything but interesting, at least of high rated countries, like the U.S or Germany.
Many of the things mentioned above don’t apply to stocks. And that’s why I find them very attractive and love to invest in them.
In contrast to real estate, shares have no maintenance costs and purchasing them doesn’t need a lot of money. You also get your passive income if you want which is called dividends. You can sell them as quickly as you bought them. Something you normally can’t do with real estate.
Behind every stock is a company. The goal of any company is to make profit either with a product or a service or both. There are people working in the company and these people add value to the company every day. This added value will be reflected in the share price. So, most of all and over the long run, the value or the price of a share is determined by the value of the company and less by the emotions of the market. Only in short term, the price is based on emotions.
Easy to learn
I’m of the opinion that stock investing is easy enough to learn. Every small investor working hard 9 to 5 can learn enough about stock investing to be successful on the stock market. It isn’t as difficult as it may seem. And heeding some basic rules will help to build a fortune, may it smaller or a greater one. Building a strategy on these rules will minimize your risk and maximize your result. (I know, there are many who aren’t the same opinion, especially here in Germany!)
Stocks are less risky than derivatives and commodities. You don’t have to be active all the time, which safes you money and nerves. Choosing stocks yourself costs you less than mutual funds and and you can decide on your own which companies you want to hold. The advantage is that you don’t have to choose bad or mediocre ones. You can concentrate on the best ones. And this will increase your return.
You have to do your homework
As for every investment you need to know what you’re doing. And I’m convinced that every can learn about being successful with stock investing. There aren’t only really good books on that subject, but you can also find everything about an interesting company you need.
But nevertheless, you have to do your homework. It’s not that difficult to research a company. But if you want to be successful over the long run, you need to do it. There is no way around it. Let me assure you, you have enough time doing it. Many investors don’t do the necessary work. I always read about in the social media. In the end this separates the wheat from the chaff.