If you’re familiar with investing concepts, then you know that stocks aren’t exactly considered to be the most reliable option.
That’s because, unlike bonds, stocks don’t offer any guarantee of investment returns. Either the company you’re investing in does well and you profit, or, well … you know the rest.
So, why do wealthy investors love to take part in stock buying and selling? And why is it that the majority of stock owners are higher-income Americans?
It turns out there are many reasons why those with capital enjoy taking their chance on the stock market. Let’s look at some of them.
It’s not good to just leave cash sitting around
Let’s start with the most obvious — you have to do something with your money. Those who have money understand there’s no point letting wealth sit in a bank account when it could be accumulating interest through stock investment.
While it’s good to have an emergency fund (and the amount that everyone wants will depend on personal comfort), hoarding too much cash in your bank account can actually prevent you from accumulating wealth.
Pro tip: If you’re making more than $5,000 a month, check out these brilliant money moves to boost your bank account.
Stocks pay better than hard work
Did you know that many of the world’s richest people — including the ultra-wealthy Jeff Bezos — take home a relatively modest salary? Instead, the vast majority of their wealth comes from owning a portion of an ultra-successful company.
It could be argued that the best way to get rich is to create a successful company. The second best way is to own shares in somebody else’s successful company. The worst way is to work a day job — though this is a necessity for most of us.
Stocks create passive income
The wealthy know that investing in stocks is a great way to generate passive income for themselves (i.e. income that takes no or minimal work to maintain).
In practical terms, this would make money earned from dividends passive income, though the IRS may tax dividends as ordinary income.
Investing is easy when it’s a way of life
The data is staggering: The wealthiest 10% of people in America own almost 90% of all stocks. There are several reasons for this, including the fact that entry into the stock market comes with a price.
However, another reason you see those with wealth gravitate toward the stock market is that they have knowledge that’s been passed down through generations.
Pro tip: Investing seems overwhelming at first but it’s pretty easy once you get the hang of it. You can help flatten the learning curve by trying out one of the best online brokerage accounts.
Extra cash flow means a higher quality of life
The average American makes around $55,000 per year. When you consider the average house costs just under half a million dollars, it’s easy to see why many people feel stretched thin.
Add in the constant fluctuation of gas prices and it’s no wonder that so many people turn to the stock market to make some extra cash.
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Investing is a way to show your business passions
For people who have extra cash to throw around, choosing which companies to invest in is a great way to establish themselves as a fan of certain companies and put their money where their mouth is.
Usually, this means showing your passion for a certain company or product, but for some investors, it’s the passion of trading itself.
Earnings beget more earnings
Compounding is one of the most important concepts in investing and the wealthy know it well. It works like this: When you make an investment, you earn interest. Compounding is the simple concept of your interest earning interest (and then that interest earning interest, etc).
Wealthy investors make a lot of money off of compounding interest because they can afford to let their investments sit for a long time.
The wealthy understand which stocks have a good track record
While there are just as many different approaches to investing in the stock market as there are people, those with a solid interest in the undertaking understand which stocks to pour their time and energy into.
Those who recommend stocks likely haven’t been heartbroken by their stock investments — at least not very often. You can follow in their footsteps by keeping track of market analysis and choosing stocks that align with your comfort level.
Index funds, like one that tracks the S&P 500, are also a great way to help make investing easier.
Stock investments can lead to a tax break
Investing in stocks as an action in and of itself doesn’t lend itself to a tax break, but there are certain situations where it might.
For example, investors have the power to deduct any investment losses. However, you will actually have to have sold your stock if you want to claim a deduction. There are also tax-advantaged accounts, such as individual retirement accounts (IRAs) and 401(k)s that can help you build wealth over the long term.
Stocks can offer protection from inflation
The word “inflation” has been thrown around a lot lately. Investors have been thinking of inflation quite a bit, too, which is why they’ve been putting some time into setting up what is known as “inflation hedges.”
Inflation hedges refer to historically steady stocks that are seen as a “protection” against inflation. Wealthy investors use inflation hedges to weather the storm by keeping their portfolio worth more steady and diversifying it at the same time.
The wealthy are less vulnerable to bad investments
We’re all capable of making bad investments. However, while a bad investment can make or break an average earner’s net worth, it’s less of a concern for those who are already sitting on cash.
While there are things we can all do to avoid bad investments and reduce money stress — like trying to diversify our portfolios — none of us have a crystal ball that can offer us complete protection.
Capital appreciation makes them rich(er)
Capital appreciation refers to a stock’s share increasing in price from what it was at the time of purchase. It’s an investor's best friend, and wealthy investors don’t ignore the power of patiently waiting for several different stocks to appreciate.
When stocks are sold at a gain it results in a capital gain, which is taxable. However, if you put off selling for as long as possible, you’ll delay those taxes as well. Some investors are able to delay taxes for decades or even generations.
While the best time to start investing in the stock market is when you’re young, the next best time is right now.
We don’t all have the same advantages as wealthy investors, but that doesn’t mean we can’t make some extra cash with the stock market. It’s not a bad time to glance over at what your wealthy peers are doing while you’re at it.
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