Reasons to Invest

There are a number of reasons to invest in stocks and other financial instruments:

  • To make money. Stocks can help shareholders gain a return on their investment in two ways: with capital gains from the stock’s price rise; and with dividends, which companies may distribute to shareholders depending on annual income. Investors in bonds are repaid through interest, typically paid annually.
  • Financial flexibility. You can buy or sell your shares anytime during the trading day. They are liquid assets, unlike other investments such as real estate. The financial structure of equities can give owners flexibility to be able to sell when cash is needed quickly such as during financial emergencies. 
  • Tax advantages. Stock investments and related investments may offer tax rebates or other benefits. In France the Plan d’épargne en actions (PEA) or in Belgium the stocks’ capital gains tax regime are relevant examples. These tax benefits differ by European country and are governed by laws that are subject to change. While tax benefits for some may prove important to some investors, they are generally not considered the primary reason for investing in equities. 
  • Portfolio diversity. Generally, the more potentially profitable an investment, the higher its risk. Stocks may generate huge earnings for a certain period of time, but can also present a high risk for financial loss. When building investment portfolio, individual investors often choose to mix distinct classes of assets to lower risk. They also consider an investment horizon: The longer the investment period, the more attractive it can be to invest in to invest in relatively risky assets, such as stocks, whose profits tend to exceed losses over time. 
  • To help spur a company’s or an economy’s growth. By investing in company shares, individual investors can contribute to their development; savvy investors often choose companies that show great promise. 

 

Investing also has disadvantages which any potential shareholder should take into account:

  • Risk of loss. This risk varies by kind of assets. It can virtually be zero when you buy a bond at its period of issuance, and then hold it in your portfolio to its maturity date. On the other hand, an investors faces a possible loss with the same bond by selling it before its maturity date. If the market is down, the selling prices can be lower than its issuing price. Selling before the maturity date also poses the risk of a loss in potential interest gains. Due to intrinsic volatility in stock prices, their risk can be higher than bonds. In trading in warrants, you can lose the entire value of your initial investment. Overall savvy investors limit their risk of loss by diversifying their portfolio holdings. 
  • Managing your portfolio. A portfolio requires proper and regular management, especially when its owner is considering a sale of assets. In financial markets, many find the most difficult circumstance is not buying but selling. 
  • Gaining financial knowledge. Even if you are advised by a financial advisor, the decision to buy, sell or hold is yours. Investing in stocks or in financial products requires an investment in knowledge about financial products, markets and economies.