12 Simple Reasons Why Wealthy People Love Buying Stocks So Much

If you’re familiar with investing concepts, then you know that stocks aren’t exactly considered to be the most reliable option if you're looking for short-term growth. 

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 it doesn't.

However, the stock market has shown steady growth over decades due to a diversity of investments. In fact, the majority of stock owners are higher-income Americans.

There are many reasons why those with capital enjoy taking their chance on the stock market, and here are some of the most important ones to help you build wealth. 

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.

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.

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.

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 wealthier people gravitate toward the stock market is that they have knowledge that’s been passed down through generations.

The average American makes around $60,580 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.

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.

Wealthy investors make a lot of money from compounding interest because they can afford to hold their investments for a long time.

Compounding is one of the most important concepts in investing, and the wealthy know it well. When you invest, you earn interest. Compounding is the simple concept of your interest earning interest (and then that interest earning interest, etc).

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.

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.

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.

Capital appreciation refers to a stock’s share increasing in price from its original price. It’s an investor's best friend, and wealthy investors don’t ignore the power of patiently waiting for several stocks to appreciate.

When stocks are sold at a gain, they result in a capital gain, which is taxable. However, if you put off selling for as long as possible, you’ll also delay those taxes. Some investors can delay taxes for decades or even generations.

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 already sitting on cash.

While there are things we can all do to avoid bad investments and wasting money — like diversifying our portfolios — none of us has a crystal ball that can offer us complete protection.  

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 money 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.