According to the latest data released by the Federal Reserve, the last time fewer Americans owned stocks than they do today was in 1995. Today, many more wealthy Americans own stocks than does the rest of the county. And while the income inequality gap for the United States has been growing, one factor in it all is certainly our investment choices.
A recent bulletin by the Federal Reserve shows that 48.8% of the American population own shares,but most of them are through their 401k or mutual funds. Only about 14% of Americans own stock directly.
I’ll wager that most of you reading this article are not invested in the stock market directly. Meaning you do not deposit money into a brokerage account and purchase shares for your own portfolio.
Should you be buying stocks and shares?
A lot of the time people forget that when you buy a stock you’re actually buying into a business. Meaning, you get to own part of a company. And that company with its leaders, employees, and staff are all there to make you money.
Owning a stock is in theory no different than buying into real estate property and renting it out. It’s an asset designed to work for you.
And that’s why when you look at buying stock in a company you need you realize you are investing in something. People often forget this and try to make a quick profit off of buying and selling fast. They look at it as a numbers game and not as a strategic financial decision. It works for some, but it is a completely different ball game. For most shareholder, buying shares is a longer term affair – and that should be your tactic too.
How risky are stock investments?
It’s important to realize that almost every investment carries risk. When entrepreneurs start new business they don’t imagine failure. Restaurant owners likewise spend a lot up front for the hope of making more in the future. And stocks are similar in that there is risk.
Investing in stocks is certainly more riskier than just putting your money in the bank. And that’s because not all companies succeed. Companies, like you and I, can make poor decisions. Decisions that impact business and ultimately stock prices.
The upside is that investing in stocks in the long term has traditionally been a fairly solid investment strategy.
The U.S. stock market has for the last 140 years done well. When it’s pieced down, stocks in the long term have returned about 7%-8% per year after inflation.
Alternatives to investing in stock?
There are plenty of options when it comes to investing your money. The four biggest and most popular investment alternatives to stocks include;
- Leaving your money in the bank
- Purchasing bonds
- Buying real estate property
- Investing in commodities and currencies
Leaving your money in the bank
You deposit your money into the bank. The bank lends the money to others, who then pay the bank an interest rate for it. The bank takes the interest earned and gives you a small cut of it in the form of interest. It’s not a lot, but it’s a reasonably safe investment.
The biggest problem with this today is that interest rates are extremely low. Some of the best rates hover around the 1% mark annually. With annual inflation rates hovering around 2% – 3% you’re actually losing money by keeping money in the bank.
Investing in bonds
Bonds are essentially you lending money directly to governments (local, state, and federal) and/or companies. You can at times earn a higher amount, but you also inherit greater risk as you are lending directly. When lending to companies, you’ll catch yourself asking if you’ll ever get any of your money back.
Buying real estate property
In this case, you traditionally buy a building or property and earn money by renting it out and hopefully through rising property values. On average your return with real estate will be higher but there’s also a higher risk involved and often a higher up front buy in cost.
Real estate markets experience bubbles just like the stock market and it costs time and money to manage your property. Additionally, when it comes time to sell, it can take time and effort. Property is far from a liquid asset.
Investing in commodities and currencies
I find that investing in commodities or foreign currencies is a risky venture. The material isn’t easy to understand and there is no fundamental easy-to-grasp driver in their pricing. With bonds you have interest rate. With real estate it’s the rent, and with stocks it’s the earnings of the company. Commodities are more of a supply and demand marketplace and currencies are based on a multitude of macroeconomic factors. It’s tougher to learn and even harder to master.
Buying Shares of Stock
Stocks are for everyone that have money to invest with. And with average returns reaching over 10% per year over the long run it’s wise to start investing sooner than later. Which begs the question, which stocks are right for you? And, how many should be purchased?
Those are questions that I’ll attempt to answer in later posts. But for now think about this.
Do you want to truly invest or speculate? There is a difference. Buying shares of a company like Johnson & Johnson or Microsoft are investments. Buying into the ‘next big thing’ like Facebook or Tesla Motors is a bit more speculative. They may be excellent, well-run companies but in the long run they carry greater risk for success and sustainability. You’re betting that they will succeed in the hopes of higher returns.
So figure out what kind of investor you’d like to be and stay tuned as I intend to explore stock investments at greater length in the near future.
Disclosure: I do not own shares of any of the stocks mentioned above.