“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen
Stocks are good investments because they help you to become wealthy. Yes, they really do. Even if you do not know a lot, investing in stocks over a long period makes you rich.
Why does that happen?
There are two reasons:
1. Stocks allow you to own successful companies: Most people become rich by owning something. They do not become rich just by lending money or saving. Over the long run, many people have become rich by owning companies and not anything else. Buying stocks helps you own companies in the easiest way possible. You just need to have some money and a computer or phone to buy them. Once you buy them, you own a company and you will become rich if the company does well and you have bought it at a reasonably fair price. That is because you own the company, you are not a lender or an employee of the company. When a company prospers, the owner also prospers.
2. Stocks have been the best investments over time: History says, that over long periods of time, stocks have outperformed all other asset classes. They have outperformed real estate, bonds, cash, gold, etc. Remember this is over long periods of time. What is long is subject to question, however if you look at periods lasting 50 years or more, they are the best investments available to man. They are also easier to manage than real estate or gold.
How does buying stocks help you to become rich?
You have to understand a concept called total return.
Total return%= Capital Appreciation+ Dividend/Initial share buy price x 100
- Capital appreciation: Say you bought a stock at $10. You sell it a year later for $15. Your capital appreciation is $5
- Dividends: Companies will pay you some money from their total earnings as cash. This is called a dividend. Say you receive a dividend of $1 over the last year
The total return is $5+$1/$10=$6/$10 x 100=60%.
So stocks are good investments because they help you own successful companies and over long periods they are the best performing investments. They do that by paying regular dividends and by capital appreciation.