There are some common misconceptions about stocks in general. The public has a view that only the super wealthy 1% should be involved in the stock market. However, this isn’t true.
With brokerages that offer commission free trades like Robinhood and Fidelity, you can purchase fractional shares and still benefit from the stock market long term. In this article, I want to talk about some of the reasons for investing in the stock market.
First off, I want to talk about what inflation is and why it matters. If you visit the grocery store regularly, you will quickly realize that your favorite yogurt prices rising each year. Or maybe your favorite brand of almond milk is a lot more expensive than it used to be. This is what inflation is. It’s the prices of things around you increasing. Let’s say that you make fifty grand a year and your living costs are thirty grand, you would have around twenty grand left for savings. Forget about taxes for a moment. But as the federal reserve came out and claimed that the inflation target is 2% a year. This means that what cost a $1 today will cost $1.02 next year. You might think that’s not a big issue but your living costs are thirty grand now which means that at this rate, your living costs will become $30,600 next year. Wait a minute. Your salary stays the same because your employers don’t give you a raise every single year. Eventually, you start to lose purchasing power, which is what you can afford with your salary. This is where investing comes into play.
The scenario described above is the most fundamental reason for investing, but you may also wonder why the federal reserve would set an inflationary target of 2%. This is because they want to the economy to expand which creates more jobs. Job creations are a good indication of how well the economy is doing. If prices are rising a little bit each year, big corporations or individuals with deep pockets, will soon realize that the cash they are holding onto are losing value each year, so they will make big purchases now instead of later. When these people or corporations make big purchases, it drives up the demand slightly which forces the supply to increase as well in order to match the pace at which the demand is increasing. This increases real economic output and that tells us whether the economy is actually expanding or contracting.
Now you don’t have to be a genius who picks every single stock correctly. You can invest into an S&P 500 index fund that tracks the economy. As the economy continues to expand, you can take advantage of that. Although you may not get the most return for your money, but your risk is very diversified. Instead of riding on one company, you have five hundred top US companies to balance out your portfolio. The companies that don’t perform well will get balanced out by the ones that do.
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