5 Reasons to Invest in the Stock Market

invest in stock market

The stock market is made to seem inaccessible and complicated on purpose. Who would want to spend all day crunching numbers while staring at a screen of red and green? I would argue this was done on purpose to keep the rich, the people who invest in the market, rich. While keeping the poor, those not invested in the market, poor. If you don’t believe it’s something you could comprehend, then you never try.

Screw that. This is the age of the internet, and millions of things are more accessible than ever before, and that includes the stock market. The accessibility of information and brokerages means anyone can do it with relative ease.

Yes, this blog is about sharing knowledge towards building wealth and financial independence to build the life we all want. But, if I’m honest, it’s also about sticking it to all of the people who have worked to keep this sort of knowledge inaccessible. Not in a Robinhood sort of way cause Robinhood the brokerage already took that name, but you get it.

If you are interested in getting started in the market and don’t give a crap about the reasons why I have a guide to the stock market focused on beginners. I won’t be offended, I get it.

1. Accessibility

As you can probably tell from the intro, this is the one I feel most strongly about. The stock market is more accessible than most people think.

Types of Accounts

Let’s start off with retirement accounts, as for most people this is the best place to start. If your employer offers any sort of match on 401k contributions, aim to first match that as soon as possible. An employer match is legitimately free guaranteed money on a 100% return. Setting up a 401k differs by company, so contact your employer to see if they offer one and how to sign up. Take note that one downside to a 401k is much more limited investment options. You likely can’t invest in individual stocks, and only get to pick from a handful of funds offered by your brokerage.

In addition to a 401k, a Roth IRA is a fantastic idea. It has a $6000 / year contribution limit, so you may max out your contribution. Both of these are vital because they grow tax-free, allowing compound interest to have a far greater effect. A Roth IRA can be opened independently through a broker such as Fidelity.

Once your 401k is fully matched and your Roth IRA contributions are maxed out, the only stock market avenue left is a taxable brokerage account. This account, as the name implies, gets no tax benefit like the retirement accounts. Meaning you are taxed on any gains you make from selling stocks for more than you paid. Though this isn’t as ideal as tax-free growth, the upside is you can withdraw your money at any time with no penalties. If you invest nearly all of your savings and decide to buy a house, you can liquidate some of your investments to help pay for the down payment. It is not generally advised to invest for short-term purchases. But if your house purchase is 5+ years out, you will likely make gains from the stock market to help you pay for it.

Open an Account

To open a Roth IRA or taxable account with a brokerage, you must first pick a brokerage. I have an entire post dedicated to the 5 best online brokerages for you. Regardless of which brokerage you pick, signing up is generally very easy through their website. If you decide on Robinhood, signup through my link to get a portion of free stock. Once you have signed up, you will likely only have to wait one or two business days for them to verify your information. Again, for a 401k, this must be done through your employer.

That’s it. Nothing fancy or complicated. Practically as easy as signing up for a new Gmail.

Why Isn’t Everyone Invested?

Most people still clearly feel that the stock market is inaccessible to them or is too risky. This is clearly outlined by the percentage of Americans invested in the stock market in one way or another. Now, this percent includes individual stocks, mutual funds, and retirement accounts such as an IRA or 401k.

Data from Gallup polls | Source: https://news.gallup.com/poll/266807/percentage-americans-owns-stock.aspx

If I’m honest, this chart makes me sad. Around 40% of the US population is missing out on consistent gains from the stock market. For most of these people, they likely either think they aren’t intelligent/rich enough to invest in the market, or that it’s too risky. The myth of required intelligence/wealth was just disproved in this section by showing how easy it is to get started. In addition, you can buy portions of shares for as little as $1.

Regarding the risk of the market, there is certainly risk involved. This goes for any investment from the stock market to real estate. However, I would argue a few counterpoints. First, in the section titled “But Why Risk It?” in my introduction to the stock market, I outline the historical gains of the market. Even though historical gains do not guarantee future returns, 100 years of average 10% returns seem pretty dang solid to me. In addition, you can focus on investing in funds that greatly diversify your portfolio automatically.

Access to Knowledge

Due to the internet, sources of knowledge like this blog are easily found on any topic, including the stock market. We have an unprecedented amount of knowledge at our fingertips. I understand that we all have busy lives, and some of us have very limited time to devote to learning about something new. My main argument for this is that you don’t have to devote a great amount of time to it. Reading a post like this per week and/or a podcast episode per week will put you way further ahead than you may think.

If you’re looking for a source to listen to while you get other stuff done, check out The Investing for Beginners Podcast. They give away a ton of knowledge at least once a week. They even have a ton of archives that cover just about any stock market question you could ask.

2. Diversify Your Income

Most people get the entirety of their income from their day job(s). In the past, this was the only realistic method to earn any substantial amount of money. Even today, it is certainly the most straightforward. Apply, get hired, work set hours, perform set duties, get paid a set amount, and hopefully, get benefits.

There is nothing wrong with having a day job, and the stock market won’t immediately replace any significant amount of your income. But if all you have is a day job, if you were to get laid off say during a recession, you would immediately have zero income. I don’t say that to scare you, I say that to help articulate the gravity of having an additional source of income. Investments can become a sort of safety net for lost wages.

The stock market should not be relied on to replace wages in the short term. It will take time to build up your portfolio and for compounding to work its magic before you see returns anywhere near your salary. This is why the earlier you start the better.

Stock market investments can also be an alternative or supplement to a side hustle. I am certainly a proponent of having a side hustle for extra income. However, it is usually not nearly as passive as the stock market. You can set up recurring investments to put your portfolio nearly on autopilot with periodic check-ins. Whereas a side hustle will require you to set aside significantly extra time to earn money. The stock market allows you to have your money work for you, even when you’re sleeping.

I would argue that the stock market is one of the most hands-off approaches to earning money

3. Build Wealth More Quickly

I’m sure you’ve heard of compound interest. Well with the stock market, compound interest is everything. Earning a percent return on your returns, plus getting dividends along the way is a powerful combination.

To see it in action, not even including dividends, check out investor.gov’s compound interest calculator. Just set the interest to 7% to emulate the stock market, and enter realistic monthly contributions and length of time until retirement. After just 20 years of a 7% return, you have already accrued more in returns than contributions. Your money has earned more money than you have put in.

Returns from a $200 monthly contribution with a 7% rate of return for 20 years | Source: investor.gov

Traditionally, to build wealth is to earn a lot of money and save it. The stock market is like a speed ramp for building wealth, getting faster and faster over time. On top of this, if you manage to move up the ladder and earn more money over time and contribute, even more, this effect is increased yet again.

An additional benefit I’ve found at least for myself is that having automatic investments forces me to save without thinking about it. It’s much easier to spend money on things you don’t need when you see that money available in your bank account. If instead 30% of your paycheck has already automatically disappeared to brokers, it’s much easier to not make this mistake.

In Atomic Habits, James Clear talks about making habits as frictionless as possible to make them stick. There is nothing more frictionless than an electronic, automated transfer from your bank to your broker. Then from cash in your broker to the broker purchasing a share of stock for you. Automating your investments can make not only investing stick but saving as a whole.

4. Financial Independence

It’s easy to see achieving financial independence as being as frugal as possible. Scraping by on bulk food items to save as much money as possible. Living “far below your means” is a common saying I’ve heard. Pushing you to use as little money as possible each month to get by.

I can’t argue that this method will certainly work, but it leads to a lot of burnout due to lack of enjoyment. It’s hard to stay focused on the positive end goal when you feel like you have nothing to enjoy at this moment. It’s similar to attempting to go on a diet by cutting your calories immediately in half with no carbs and no sugar. More than likely you will fail when it quickly becomes overwhelming.

Instead, I suggest certainly saving what you comfortably can, but doing more with that savings than squirreling it away. The stock market can be a vehicle to grow your savings. Alleviating some of the financial stress from saving every dime you can. Your portfolio growing by 7-10% every year makes it far easier to achieve whatever goal you have set for yourself to reach financial independence.

The stock market is even more helpful once you finally reach financial independence. For many people, their stock market returns to become a good chunk of the income they live off of. They put little to no effort in, and get enough money to cover food or rent, without diminishing their portfolio. Regardless, when you live without a consistent paycheck or any paycheck at all, every bit of hands-off income is a blessing.

If you feel lost as to what financial independence is and what it means to you, I have a whole separate post focused on this exact topic. An overview like this is vital to setting up your personal road map to financial independence.

5. Free Money (Dividends)

Dividends are a spectacular aspect of the stock market. Dividends are sums of money companies pay to their shareholders, simply for being shareholders. For example, a company with a 4% dividend yield would pay you 4% of the equity you hold in the company annually in dividends. If you hold $100 worth of that stock, you would get back $4.

Think of dividends as a reward from the company for sticking with them. The stock market can have tons of ups and downs, as we certainly have seen these past two years. The market hit all-time highs and then dropped 20%. The more companies reward investors for investing in them, the more likely that investor is to stick around. Assuming a company is still in good standing, the amount of its dividend will stay consistent or even increase. In the above example, if the value of your holdings dropped to $90, the company would still pay a $4 dividend. The astute among you will realize this means that your percent yield has now increased from 4% to 4.4%.

Keep this in mind as it is very valuable. When the market has a downturn, dividends incentivize you to stick around. You will be rewarded with higher percent returns through your dividends.

Dividend Reinvestment

Though it sounds exciting to take these dividends as cash and run, the best thing I have found is to reinvest those dividends. Dividend reinvestment means using those dividends to purchase more of that company. In the example above with a 4% yield, that 4$ dividend would be used to purchase 4% of an additional share, meaning you now have 1.04 shares.

It’s easy to get discouraged by these small numbers. We want to be seeing 100% returns here. But that takes time. See here the effect that dividends have on your growth.

$1,000 Invested 42 Years Ago With and Without Dividend Reinvestment | Source: wealthycorner.com

Dividend reinvestment makes a massive difference. Not only are you earning a dividend initially. But now you hold more shares, meaning you get a greater dividend, earning you more shares, earning you more dividends. All the while, the greater your portfolio size, the greater the return you get. Dividends put compound interest on steroids.

If you decide not to invest in the stock market, you are missing out on dividends entirely. You are leaving a huge chunk of money on the table in the long run.

Further Info

If you want more of a rundown on dividends and the market as a whole, take a look at the “Dividends on Dividends” section in my intro to the stock market post.

To get more information on how to actually buy and sell stocks on the market, take a look at my post covering exactly that.

Evan from My Money Marathon

Evan from My Money Marathon

Hey, my name is Evan. I am a personal finance blogger passionate about bringing beginner
investors into the stock market world. Go here to read about my story, from knowing
nothing about investing to being well on my way to financial independence.

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