Stocks are among the primary investment options for people looking to achieve a variety of financial goals. Common reasons people invest in the stock market include wealth building, passive income and diverse equity choices.
Investors with a goal of building wealth in the stock market typically place at least a portion of their investments into higher-risk, high-growth stocks. Relative to other traditional investments, the stock market offers the highest potential returns, according to Morningstar. Historically, stocks have averaged about a 10 percent annual return on investment since 1926. This compares very favorably to savings or money market accounts and bonds. It isn't uncommon for a high-growth stock to double or triple within a year's time with the right catalyst.
For more conservative investors, the stock market presents opportunities to earn passive income through safer blue-chip companies like Microsoft or Apple. People who don't have much time to research and execute trades benefit from holding high-dividend stocks to earn investment income. One strategy is to buy shares in a large, safe company, with a plan to hold them for an extended time before selling. Another is to invest in stocks that give dividends to shareholders. Dividends are periodic distributions of a company's excess cash. For an investor, these stocks allow an opportunity to generate income while holding shares. As long as the company remains strong, the shareholder continues to earn.
People also invest in the stock market as part of a company-sponsored or individual retirement plan, such as a 401(k).
Diverse Investment Options
The stock market has a vast array of investment options. It is sometimes more risky to not invest and lose out on inflation over time than to select a mix of safe and diverse stocks. Some investors opt to put all of their money into one or two stocks, but others prefer the safety of a diversified portfolio. Spreading investments across many sectors and companies helps guard against a devastated portfolio if one sector or company plunges.
Investors may also select stocks that align with personal passions or hobbies. In addition to making money, investors often like to support companies that are socially and environmentally responsible. Investing in art, pet care services and sports companies are other ways to engage through investing in a personal area of interest.