“No way. I worked day and night to earn that money. I am not going to gamble it away in the stock market.”
That was my dad’s wisdom, someone who was reluctant to do anything with his hard earned money that didn’t involve either a Fixed Deposits (FDs) or insured CD/bonds.
These words sound familiar to you?
Maybe you know someone like him or maybe it’s you!
It is normal to be concerned about risking your savings in the stock market. But if fear of loss has you paralyzed, read this article.
In this article
- Why everyone should invest in stocks
- Invest in stocks – one way or the other
- The Bottom Line
Why everyone should invest in stocks
1. Investing in stocks is not gambling
This is one of the major reason why many people shy away from the stock market.
In order to understand why investing in stock markets is inherently different from gambling, we need to learn what it means to buy stocks.
A share of common stock represents ownership in a listed company. It entitles the investor to a claim on assets as well as a fraction of the profits that the company generates.
But the problem is, investors think of shares as simply trading instruments, and they forget that stock represents ownership.
A listed company can survive without profits for a short duration because of the expectations of future earnings, but no company can fool investors forever and eventually, a company’s stock price will show its true value.
Whereas on the other hand, gambling, is a zero-sum game. A game where money is taken from a loser and is given to a winner.
No value is ever created through gambling whereas the overall wealth of an economy increases through investing in the stock market.
As companies compete, the productivity increases and new products are developed that improve lives.
So, investing and creating wealth in the stock market should not be confused with gambling’s zero-sum game.
2. The stock markets are not exclusively for brokers and rich people
3. Stocks that rise up must come down – not true
Newton laws of physics do not apply to the stock market, and also there is no gravitational force to pull stocks back to even.
Although it is not true to say that the stocks never undergo a market correction, the point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock will not continue to rise in future times.
4. A bad experience passes on
The way the stock market works is that profits are provided regularly over long stretches of time and then losses show up in concentrated form during a stock market crash.
People never forget the experience of living through a stock crash because they lose savings that it took them decades to accumulate and the word is passed down through the generations.
Many young people today have never had the experience a stock market crisis but they have heard about it from their parents or grandparents.
This creates an environment of fear that always remains in the back of their minds.
But this bad experience comes from people who weren’t investing correctly.
People who invested in the stock markets with sound research and remained invested for the long term rode out those falls and crashes and made great returns despite the downturns.
5. Fear of losing wealth leads to erosion of wealth
The nature of the human species is such that it is not designed to accept losses.
People do irrational things to avoid making losses, it is a fact that is scientifically proven. One of the biggest fears they have is that of losing wealth.
Hence peoples’ natural reaction to a stock market downturn is flight, and not fight.
And thus, people want to take the least amount of risk. But staying away from risk, people gradually fall prey to inflation. The value of their wealth erodes away.
In the long term, markets have proven to be wealth generators despite crashes.
Invest in stocks – one way or the other
A famous stock market investor once said that “You can not win by sitting on the bench. You have to be in the game. To put it another way, fear is not rewarded. Courage is.”
The entice of big money has always thrown investors into the lap of stock markets.
Making money in stocks requires a very great amount of patience and discipline, but also a great deal of research and a good understanding of the stock market, among others.
Investors should also consider the implications of not investing their hard-earned money in the stock market. Stock market investment is one of the best ways to build wealth over time.
It is actually riskier to keep money in the form of cash or in your saving accounts, as wealth will then not grow faster than the prevailing rate of inflation in the country, thereby resulting in lower spending power.
If you do not have the time to educate yourself about stocks, a very good option would be to invest in the stock markets via mutual funds. Investing in mutual funds is like outsourcing investing to an expert.
Here is all you need to know about mutual funds.
The Bottom Line
“What’s obvious is obviously wrong” is another adage.
It implies that knowing just a little will only have you following the herd like a sheep.
Investment in the stock market isn’t scary. It’s the losers who make it look scary.
People who have no idea about what they are doing and invest their money without any stock market knowledge and research, they lose it and call it gambling.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.