“The key to making money in stocks is not to get scared out of them.” ― Peter Lynch
The stock market refers to public markets for issuing, purchasing, and selling stocks that trade over-the-counter or on a stock exchange.
Stocks, sometimes known as equities, represent fractional ownership in a corporation, and the stock market is a marketplace for investors to buy and sell such investable assets.
A well-functioning stock market is crucial to economic development because it allows businesses to swiftly acquire funds from the general public.
In a word, stock exchanges provide a safe and regulated environment in which market participants can confidently trade shares and other qualified financial products with zero to low operational risk. The stock markets operate as primary and secondary markets, according to the guidelines set forth by the regulator.
Although most countries have one stock exchange, there can be more than one stock exchange in a country.
(Related blog: 10 Largest Stock Exchanges in the World)
In this blog, we are going to focus on the benefits of the stock market.
What are the Benefits of the Stock Market?
The stock market provides the investor with several benefits and provides them with the easy handling of their money. These benefits include;
The ability of the market to generate the kinds of gains it does is the most essential component of investing directly in markets.
Stock markets have always stood the test of time, rising in value over time, even though individual stock values fluctuate daily, according to historical data.
Investing in companies with a consistent growth pattern and increased earnings every quarter, or in industries that contribute to the country's economic growth, will result in you steadily developing your wealth and growing the value of your investment over time.
As this value grows, there is a gain of money and the investors receive all the benefits over the money they had invested. It is said that a long-term investment in certain stocks is a guarantee of gain in the stock market.
Safety against Inflation
The fundamental goal of investments is to guarantee our future, but we must keep track of inflation regularly.
The gains will be nil if inflation and the rate of return on investments are comparable. In an ideal world, the rate of return on investments would be higher than inflation.
Stock markets and benchmark indexes have consistently outperformed inflation.
(Must read: What is Inflation? Demand-pull and Cost-push)
If inflation is about 3-4 percent, for example, markets have seen annual returns of roughly ten percent.
Also, the benchmarks with their rise and fall have been the prime source of prediction of inflation. For example, if the market is constantly crashing then the news breaks out that inflation is near in the country.
Liquidity or Ease of Conversion
Stocks are considered liquid assets since they can be easily converted to cash and have a large number of purchasers at any given time.
The same cannot be said for all assets; some, such as real estate, are difficult to sell. It could take months to see a return on your home investment. It is, however, much simpler in the case of stocks.
If the average volume of transactions is high then we can say that there are multiple buyers and sellers for that specific stock.
This liquidity of a stock market is one of the key benefits for the investors as the process never stops.
Investors get the advantage of economy
The stock market is always a factor in a thriving economy, and it responds to all economic growth indices like gross domestic product (GDP), inflation, corporate profit, and so on.
Investors in the stock market can directly benefit from a thriving economy, and the value of their investments rises in lockstep with economic expansion.
When an economy is growing, corporate earnings rise, and as a result, the ordinary individual's income rises.
As a result, customer demand rises, increasing sales. As a result, the value of your investment in a specific company rises, i.e. the share price rises.
The stock market in every country is regulated by a regulatory body, for example in India, the body is SEBI. the market functions by the guidelines of it and the bodies regulate stock exchange, transparency in the market, and protect the rights of investors.
This means that when an investor invests in the stock market, not only his money but also his rights are protected by these regulatory bodies. This saves them from any kind of fraudulent activity done by the company they have invested in.
This makes the investments even secure and gives the investors the confidence and trust of no mishappenings.
(Must read: What is fundamental analysis?)
Flexibility of investment
For a beginner in the stock market, the road isn’t easy and the risks need to be smaller.
For this, they need to invest in stocks that are not high priced. This is where the stock market helps the investor. It gives them the flexibility of smaller investments. These small investments can be done by buying small-cap and mid-cap stocks. Stocks do not require a large initial investment.
Another advantage of directly investing in stocks is that you can buy at your leisure; you are not obligated to invest a certain amount every month.
Benefits of Dividend
A dividend is an additional income for investors, which is paid annually by most companies.
Dividend payments arrive even if the stock has lost value and represent income on top of any profits that come from eventually selling the stock.
These dividend incomes too have a lot of benefits.
Ownership stake in the brand
By investing in stocks of a certain company the investor buys an ownership stake in the company. It offers them a sense of belonging to the company you enjoy.
It implies that as a shareholder, they have a say in how a corporation makes choices and can vote on those decisions. Several times, shareholders have intervened to prevent management from making irrational actions that are harmful to their interests.
The annual report of any company is sent to its stockholders to let them know about the functioning.
A Hassle-Free Trading
Technology has helped almost all the existent sectors. The stock market isn’t untouched by it. Stocks can be bought and sold easily with the help of technology. Earlier when all the work was limited to pen and paper, this hassle-free trading wasn’t feasible for many.
Nowadays there are various mobile applications for this purpose. One can easily buy or sell their stocks in a certain company. Various platforms are there which tell the investors about the profit and loss of any specific stock so that they can easily know which stock to invest in.
(Also read: 10 Fundamentals of Technical Analysis)
Versatility of investment
Shares, bonds, mutual funds, and derivatives are among the financial products available in the stock market. This gives investors a wide range of things to choose from when it comes to investing their money.
This flexibility benefits investors by allowing them to diversify their investment portfolios, which helps to mitigate the risks associated with stock investing. As for explaining about risks, here are 4 types of financial risk in the banking industry.
These were the benefits of planned investment in the stock market. Although there is a bit of risk that we often hear from people around us, we don’t always look at the benefits of it.
(Recommended blog: Introduction to investment banking)
Proper research in the stock market is never harmful to investment, not just it reduces risk but also guarantees profit to you. And lastly, most importantly it protects your money.