By Philip Moskie
The stock market historically has returned on average between 7% and 10% annually. While this relatively high rate of return is the reason why most investors are attracted to stocks, it is not the only reason. There are other tangible and intangible factors that add another layer of benefit making the stock market the best way to grow your money.
| Factors to consider when choosing an investment |
| Rate of Return | How much money can I make? |
| Barriers to Entry | How hard is it to get involved? |
| Ability to Adjust Risk | How risky is the investment and can I reduce the risk? |
| Time Commitment | How much time am I going to have to spend doing this? |
| Learning Curve | Is this really complicated and hard to learn? |
| Ease of Use | Are there systems in place or am I going to have to do everything myself? |
| Access to information | How difficult is it to get the information that you need? |
| Time to Revenue | How long is it going to take before I can actually make money |
Table of Contents
- Introduction
- How does trading stocks compare to other ways of making money?
Stocks vs. Bonds
Stocks vs. Owning a business
Stocks vs. Real Estate
Stocks vs. Crypto - Pros and cons of the stock market
- Conclusion
Introduction:
There are many investment vehicles you can use to create and grow your wealth. You can use stocks; bonds; crypto currency; real estate; or you can run a business. In this post we are going to discuss why stocks are the best way for the average person to protect and grow their wealth. We will compare stocks to other forms of investment/ways of making money and attempt to prove our argument that stocks are the best tool in the investor’s arsenal.
How does trading stocks compare to other ways of making money?
The first thing we want to do is look at stocks compared to other investments and/or side hustles. I believe you must look at all factors and not just rate of return when you examine these other endeavors. For example, when considering an investment, you must take into account things such as the required commitment of your time to that activity.
The stock market with its mature and fully developed systems allow an investor to start immediately and spend as much or as little time that they want to. Your time is worth money and you must factor the cost of your time into the equation. That being said, let’s jump right in:
Stocks vs. Bonds
A bond’s yield, or the interest rate it pays, and the bond’s price are at inverse ratios to each other. This means that when interest rates go up, bond prices go down. When interest rates go down, bond prices go up. Its automatic and it is how bonds work.
Since we currently are at the end of a historically long cycle of extremely low interest rates, there really is no direction that interest rates can go but up. In addition, recent events have lit a fire under inflation and rates are now soaring way beyond the 3% annual rate we have been experiencing for decades.
Future interest rate increases are needed to stem this inflation. Because of this, it is really is the worst time to invest in bonds. It makes no sense to invest your money in an asset that is guaranteed to lose value.
Yes, stocks are at historic highs and the general market will go down with each interest rate increase. However, a skillful trader can use his skills to show positive returns while the market is going down. Bonds on the other hand are locked into their negative situation with no escape.
Stocks vs owning a business:
Owning a business can make you rich. However, it is a long hard process. It usually takes a minimum of 2 years to get a business profitable if it ever gets there, no guarantees here. Owning a business is a full-time commitment. In many cases it is a 24/7 obligation. Yes, it is possible to run a small business on the side or what is called a “side hustle”, but don’t be fooled into thinking that it will not have a large commitment of time and energy to make it work.
Unlike starting a business, when you decide to trade stocks, you can start immediately. There is a basic period of learning and training of about 6 months. The beauty here though is that it is possible to begin earning while you learn. Even if you are not comfortable starting with real money, it is now possible to start practicing on a trading simulator to make sure you know when you are ready.
Stocks vs. Real Estate
Real estate is a proven long-term way to make a lot of money. However, investing in real is just like starting a business. It is a long hard road that takes a lot of time, hard work and also involves putting large amounts of money at risk. Unless you have a nest egg of cash to plunk down you will have to borrow a sizable sum of money in the form of a mortgage. There is also a large amount of learning that you need to do before you actually start investing. Yes, some people have blindly jumped into a real estate investment and made money. For most people though, there is going to be a big learning curve in becoming a profitable real estate investor.
Stocks allow you to get in the game quick and start with small amounts of money. This allows you to earn while you learn and never put yourself at too much risk. With stocks it is very easy to get in the game and start making money.
Stocks vs. Crypto
By now we have all heard about the get rich stories that have come out of the crypto world. Crypto is certainly a good place to put some of your money. I say it is a good place to put some of your money, not most or all of your money. Crypto is considered the riskiest asset class you can invest your money in. Just as some have made hundreds or even thousands of percentage returns in crypto, others have lost similar or more.
In addition to the market risk, there is also the risk of having your money stolen or lost. Working in the crypto world is also not easy. We will not go into the details here, but the basic structure of the crypto market is still relatively undeveloped which makes moving your money and trading very difficult.
Stocks however are very easy to use. You set up your account and start trading. You finish the year and they send you a document to give to your accountant for taxes.
Pros and Cons of the stock market
Now that we have taken a look at stocks vs. other ways to make money let’s now turn to what we see as the positives of the stock market and why most people should be in it.
| Pro | Con |
| Traditionally best way to beat inflation · Better Rates of Return | Risk |
| Low Barrier to Entry · No Commission (profitability easier) · No Account Mins (Small Amounts) | Limited Fractional Ownership |
| Adjust your risk · Diversification · Trading Skills | |
| Ease of use · Availability of info · Trading Platform |
Stocks are the best way to beat inflation:
Traditionally stocks have been the most consistent way to beat inflation. You only have to take a look at the all-time chart of the DOW Industrials at TradingView to see why this is the case. Depending on who you ask, on average the stock market has returned somewhere between 7% and 10% annual. Until recently, inflation has hovered around 3% annual for a very long time. Recent events however have sparked inflation which is currently running around 7% annual. It is therefore absolutely essential that you get some of your money in the market just so you can stay ahead of inflation.
Stocks Have A Low Barrier to Entry
I have to reiterate again how important the items in this section are. When we say barriers to entry we mean: A barrier to entry is any law, rule, requirement, challenge or “minimum” that makes it harder for someone to enter into an industry or a new area of business. There has been a concerted effort of the financial institutions to find ways to get small investors involved in the market. There is just too much money on the sidelines with these small investors for Wall Street to ignore. They have continually lowered the barriers to entry and that is good news for you.
No Account Minimums: As we have mentioned in other articles, most online brokerage firms now allow you to open an account with almost no money. This has opened up the ability to almost anyone who wants to start trading to do so. Every other type of investment or business endeavor involves a substantial amount of money to invest. Stocks are one of the most affordable options for those looking to start making more money.
No Commission: a recent development in the investing community is no commission trading. In the past these firms charged you per trade. If you were making purchases in the thousands of dollars, the fees they charged were a small percentage of the trade. However, if you were trading small dollar amounts, it resulted in commissions that were a large percentage of the invested capital and thus small investors had an extremely hard time making profitable trades. Zero commission trading has leveled the playing field for the small investor. The dollars that used to go to the brokerage firm now work toward making you a profitable trader.
Stocks allow you to adjust your risk:
Diversification
All stocks involve some level of risk. However, in the stock market you are able to purchase a full spectrum of stocks from those that carry very low risk, to those that carry very high risk. For example, utility stocks move very slowly and usually carry a significant dividend. Many investors buy these for cash flow and slow growth. This is called diversification and there are many different ways to diversify the types of stocks you invest in based on your overall goals.
Trading Skills
You can also learn to trade stocks skillfully and reduce the level of risk that comes with investing in the market. Once again, there is always risk involved when buying or trading stocks. It is your job to learn to become skilled enough to extract money from the market on a consistent basis while still staying within an acceptable level of risk for you.
Stocks are easy to use
One of the things that people underestimate is how difficult many money-making endeavors are. Stocks are the easiest way to start making money because all of the mechanisms are in place to get started immediately. For example, if you have enough money you can invest in real estate. However, it will take you 6 months to a year to find a suitable investment. It will then take another 6 months to process the purchase of the property and then another few months to get tenants and start to make cash flow. With the stock market you can start tomorrow if you want. There really is no easier way to start making money than the stock market.
Availability of info
The internet has literally changed the way we get and use information in all parts of our lives. From recipes for tonight’s dinner to how to fix your toilet, any information you need to complete a task is literally at your fingertips. Nowhere is this new access to information more important than when it comes to investing.
Imagine having to go to your broker and ask them to mail you some information on a potential stock you are thinking of buying. Or better yet, imagine they don’t have much on that stock, so you have to call the company and ask them to send you a copy of their annual report, so you can learn about the company.
There has never been a time where the availability of information has been easier than it is now. Take advantage of this on all levels of your trading and investing. If you are building a long-term position, go to the company’s web site. Get their filings to the SEC and read them. Web search the company and see if there are any issues you might not know about. Use your trading platform to look at the fundamentals along with the technical and charts. The old saying goes here: there are no stupid questions.
Trading platforms
Another recent development that has been spawned due to the growth of the internet is the existence of many different trading platforms. These platforms contain everything you need to trade. This includes the ability to enter and execute your orders, the ability to look at charts and other trading tools and the ability to track the performance of your positions. Many of the bank owned trading platforms like TD Ameritrade allow you to directly move your money from your bank account into and out of your trading account. It goes without saying that these trading platforms make it extremely easy to get involved in the stock market.
Conclusion
In this post we have examined the reasons why the stock market is the best way to protect and grow your money. First of all, we compared stocks to other types of investments and ways to make money. This included buying stocks vs. owning a business; stocks vs. bonds; stocks vs. crypto etc. Then we examined the advantages of stocks vs. these other investments and the characteristics of why stocks are better. We examined such things as the historically better rates of return than other traditional investments; low barriers to entry for investors; how the ability to adjust your risk fits many different investor profiles and one of the main advantages: the ease of use of the market.
The bottom line is that the stock market is the best overall way to invest your money. There is a lot of learning to do, so keep reading our posts and start practicing the craft of trading via a trading simulator.