Investing in a securities market, also called investing in stocks and bonds, is one of the primary ways to build wealth through capital appreciation -- an increase in the securities’ value over time. Savings accounts earn interest, and the principal is absolutely secure because these accounts are insured by the FDIC, the Federal Deposit Insurance Corp. Even if the bank where you have your deposit fails, your money is protected up to the insurance limit of $250,000.
Higher Rate of Return
The stock market has its ups and downs, but a patient investor who holds stocks as a long-term investment -- five years or more -- historically earns a higher rate of return than someone who puts his money in a savings account. Buying stock shares means having an ownership interest in a company. As the company grows and becomes more profitable, the value of the shares increases. At times, stocks can rise dramatically, allowing investors to earn double-digit returns on their investment portfolios -- much more than savings account holders earn. Over the last 60 years, the average annual rate of return on stocks has been 11 percent -- 7 percent when adjusted for inflation.
Capital Gains and Dividends
Investors in stocks can earn money two ways: capital gains and dividends. Savings account holders just earn interest. Many corporations pay cash dividends, usually quarterly, to shareholders. The big payoff for stock investors is the capital gain, which is the difference between the value of the stock when it is sold and the value when it was purchased.
A century ago, the universe of possible investments was so limited that their prices could be published in the morning newspaper. These days, the investment world is like a giant supermarket, with choices to fit every financial objective. Of course, in this supermarket it’s not easy to spot the potentially rotten eggs. Mutual funds are considered excellent ways for the beginning investor to get started. These are professionally managed funds that select groups of securities. The investor purchases shares of the overall fund, not the individual stocks. If you want a combination of current income and growth, certain funds are designed to accomplish that objective. If you want a riskier portfolio with the potential for faster growth, you can choose from among the “aggressive growth” mutual funds. Savings accounts provide just one major objective: a stress-free way to earn a modest return.
The Fun of Investing
Investing is challenging, can be exciting and is a learning experience. Selecting stocks to invest in doesn’t require an advanced degree in finance, but it does require careful research and keeping up with current economic trends. It’s a great thrill to participate in a bull market -- one in which stocks go up in price -- and watch the value of your investments climb week by week. A savings account may be a safe place to park your money without the worry that comes with stocks, which can decline in value. But it is also boring. No one ever impresses his friends at a party by exclaiming, “The interest rate on my savings account jumped a quarter of a point last month!”
- SimpleStockInvesting.com: S&P 500: Total and Inflation-Adjusted Historical Returns
- SmartMoney.com: How to Protect Your Cash Now
- “Get a Financial Life: Personal Finance In Your Twenties and Thirties”; Beth Kobliner; 2009
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