I’m a big fan of buying stocks and shares to build long-term wealth. Indeed, I’ve been doing this since I turned 18 in 1986.
I’m a stock picker, so I choose which shares to buy myself. Also, I have invested money in low-cost index trackers that follow the US, UK, or global markets. What I don’t do is hand over my cash to highly paid fund managers who may (but usually don’t) beat the market.
Why buy stocks and shares?
I can think of many reasons why I’ve spent 37 years buying and owning a wide range of company shares. Here are five of my best benefits of share ownership:
1. I become an owner
When I buy shares in public companies — for example, those listed in London or New York — I immediately and automatically become part-owner of those businesses. And the more stocks and shares I buy, the larger my ownership stake.
Of course, the ongoing values of my holdings largely depend on the future success of the firms I’ve bought into. When these companies do well, I also benefit as an owner. Also, being a lazy chap, I welcome the idea of other people working for me, as well as for themselves and their employers.
2. I love passive income
I’m a huge believer in passive income — earnings that come from outside paid work. I don’t want to be a buy-to-let landlord, because it looks like too much hassle. Also, I don’t expect my cash savings on deposit to make me rich.
That’s why my favourite form of unearned income is the cash dividends paid by stocks and shares. But not all listed companies pay dividends to shareholders. In fact, most don’t, which is why our family portfolio is concentrated in dividend-paying FTSE 100 and FTSE 250 holdings.
That said, future dividends are not guaranteed, so they can be cut or cancelled at any time. This happened repeatedly during 2020/21’s Covid-19 crisis. Therefore, I diversify (spread my money) across different companies, sectors, and countries to reduce risk.
3. I grab tax-free capital gains
When I buy stocks and shares that later go up in value, this creates a paper gain. But when I sell shares at a profit, this creates capital gains that may or may not be taxable. However, by investing inside a personal pension or Stocks and Shares ISA, this keeps the taxman’s hands off my investment profits. Nice.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
4. I hate inflation
Inflation is the tendency for the prices of goods and services to rise over time. The Bank of England sets interest rates with the aim of keeping UK inflation at around 2%. But it’s been running wild since late-2021, peaking at a whopping 11.1% in the year to October 2022. (It’s since fallen back to 6.7% in August.)
As prices rise over time, inflation erodes the value of my money. But history shows that by investing in stocks and shares over the long run, I stand the best chance of my money keeping track with or beating inflation.
5. I can vote (and complain)
Finally, as a shareholder, I can attend companies’ annual general meetings and address the board as co-owners. I can then complain about poor service, strategy, or returns, which I’ve done in person many times!
