When you invest in stocks, you are purchasing a small fraction of a company with the expectation of financial gain. However, stock prices may rise or fall depending on the strength of the company. Solid companies typically increase in value over the long term, but weak companies, or even strong companies in a weak economy, may degrade over time. When deciding between stocks and lower-risk investments, such as savings accounts or Treasury bonds, it is helpful to understand the benefits of investing in stocks.
Stocks typically offer greater returns than low-risk alternatives. According to Florida International Business, common S&P 500 stocks averaged 13.3 percent annual return between 1950 and 2005, more than twice the return on long-term Treasury bonds. Coming back from a weak U.S. economy, the same common stocks gained a total of 42.38 percent from January 2009 through November 2011, according to data from CNN Money.
Some companies distribute a specific amount of company profits per share by way of dividends. These dividends do not fluctuate with the value of the stock, so they offer investors regular, fixed cash payments in addition to any stock growth. Many companies even increase dividend payouts over time, but rarely do they reduce them.
When investing in stocks, you have numerous companies from which to choose, spanning a wide breadth of sectors, such as technology or finance. By investing in a variety of stocks, you limit your exposure to any one sector. If the finance sector crashes but the technology sector booms, you've already covered your loss.
Stocks are a liquid asset, which means they are easily converted into cash. Unlike some investments, you can sell stocks at any time. This is especially helpful during a financial emergency, such as having a baby or getting laid off.
When you sell stocks for less than your purchase price, you experience a capital loss. Applying these losses against capital gains offsets taxes owed on the gain. If your net return was a loss, you may deduct up to $3,000 of the loss against your regular income. Losses greater than $3,000 may be applied to subsequent years.
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