If you can't decide whether to invest in stock market, here are ten reasons why you should.
A friend of mine hates risk -- he would much rather leave his money in the bank than buy shares with his spare cash. When we ran into each other recently, he challenged me to come up with half a dozen good reasons why he should buy shares. Not being someone who readily turns down a challenge, here are the reasons I came up with.
Beating inflation
Over the last 50 years, the London stock market has returned an average annual real return of 6.6% -- that 's after inflation. Cash in deposit accounts delivered an average annual real return of just 2%.*
It's easy to buy and sell shares
Compared to other investments such as art or fine wines, shares are very easy to manage -- they can be bought and sold quite quickly. And unlike say, selling a property, you can dispose of part of your share portfolio with comparative ease. Additionally, brokerage fees on transactions are lower, especially if you use discount online brokers.
There's more information than ever
Gone are the days when investors had to scratch around furtively for information about companies they are interested in. Today's brokers provide clients with swathes of data about companies. This not only relates to historical performance, but useful forecasts about how businesses may perform in the future.
Invest in the products you like
If you like a particular company's products then chances are that other people may think likewise. So instead of just forking out for the company's goods or service, why not buy a share in the business, too.
Dividends
One way that companies reward shareholders is through the payment of dividends. This is a share of the profits that companies make and it represents real cash in the pockets if shareholders. Currently, FTSE 100 companies are yielding around 3%, and some high street bank shares are yielding more than their deposit accounts.
Capital growth
Capital growth is perhaps the main reason why most investors buy shares. In the short-term share prices may fluctuate, which can give the impression that investing in the stock market is risky. But generally, profits at good companies tend to grow over time, and it is the profit growth that drives share prices higher.
And for good measure I threw in a four more reason for investing in shares.
Diversification
It will not have gone unnoticed to homeowners that house prices have appreciated considerably in recent years. This means that a greater proportion of our wealth may be tied up in bricks and mortar, which can be risky if house prices fall. However, we can go some way towards redressing the imbalance by increasing our investment in other assets such as shares.
Bigger tax breaks
Currently, you can shelter £3,000 every year in a cash mini ISA, but you can salt away £4,000 in a stocks and shares mini ISA. And if you opt for a maxi ISA, then you can invest up to £7,000 each year, of which the whole lot can be used for buying shares tax free!
Shareholder perks
Some companies offer generous discounts to shareholders when they buy goods or services either from them or their subsidiaries. Usually there is a minimum holding period or a minimum number of shares you must own to qualify for the perks.
It's fun
And finally, it can be fun to invest in shares. If you are new to investing then joining a local investment club can be one way to get started with shares. And since many clubs tend to hold their meetings in the local pub, it can be an enjoyable way to invest while socialising with like-minded friends.
So there you have it -- my ten reasons to buy shares. If you are new to buying and selling shares, why not start today with a low-cost index tracker, which is an effortless way to get exposure to the stock market.
* Barclays Equity Gilt Study 2006
