22

My uncle wants me to invest money in buying shares. I would like to ask these questions to my fellow users:

  • Is it wise to invest money in the stock market?
  • Is there any age limit to start into stock market?
  • Pros and cons when choosing to do so?
Chris W. Rea
  • 31,671
  • 16
  • 102
  • 190
Pandiya Chendur
  • 717
  • 5
  • 11
  • 3
    It would help to answer this question if we understood a little better why you are considering investing in the stock market, especially for the first question. – JohnFx Jul 08 '11 at 06:46

7 Answers7

61

It's wise to invest in the stock market if it's the best alternative. What are the alternatives?

  • You can pay down debt, which probably has an interest rate over 6% unless it's mortgage debt
    • This is almost always the wisest thing to do with your money
    • Debt whose interest can be deducted from your taxable income may be an exception; this varies widely by country
    • Some debt (eg student loans) may have an artificially low rate, and is not worth paying off quickly
  • You can keep your money in cash. Your money will very, very slowly lose value due to inflation. Your money can be stolen.
  • You can stick it in a bank savings account. You will make a very small amount of money in interest. This can make up for some of the inflation. You can get it out of the account whenever you need it.
    • You might have better luck with a CD, which is harder to get money out of, but pays more interest.
  • You can buy US Treasury bonds. You will make a small amount of money in interest. (3.36% a year means your money will double in about 20 years, not adjusting for inflation.) It's not the easiest thing to sell them all at once.
  • You can buy commodities like gold (or maybe silver). You can buy these directly, or through some sort of a fund (the exchange traded fund GLD, for instance, just holds a bunch of gold).
    • It doesn't really pay you any money to just own gold, but it might be worth more later (because of inflation or a falling dollar).
    • It might be worth less later, too, but short of global thermonuclear war gold's probably never really going to be worthless. It can be stolen, though.
    • It's really trendy to buy gold right now. Some people think that's made it overpriced.
  • You can buy a diversified portfolio of stocks and bonds (Treasury bonds and otherwise) and make a significant amount of gains (6-7% average returns means that your money doubles every 10-12 years - not adjusting for inflation).
    • However, the value of your stocks will be highly volatile (if you needed to withdraw money during the stock market crash of 2009, you would incur substantial losses, but if you waited long enough you'd have made a lot of it back already).
    • There are also trading fees, which can be significant if you are only putting in small amounts of money at a time. Buying individual stocks is more efficient when done with hundreds or thousands of dollars at once.
    • Stock trading can also make your taxes more complicated. You will need to keep track of each trade. You can avoid this problem, and the taxes, if you invest in a tax shelter like a 401(k) or IRA. But then you can't take your money out as readily.
    • If you don't buy a diversified portfolio, it is pretty risky. You can lose all your money if the company goes bankrupt.
  • You can buy mutual funds that do a lot of the work for you, instead of buying stocks and bonds directly.
    • This is a good idea for a lot of people.
    • The fees they charge may reduce your returns a little, though.
    • Some "target date" mutual funds will even rebalance your portfolio as you get closer to your retirement and you need your money.
  • You can invest your money in something which will save you more money than you could make doing any of these things (like insulating your home, for instance).
    • Finding things which will actually save you that much money can be hard. Most home improvement projects and other big expenditures won't save you much money unless what you have right now is very wasteful.
    • Unlike money you earn, you don't have to pay taxes on money you save.
  • You can spend it.
    • Spending your money all on booze? Not so wise.
    • Seriously though, money is useful because it can be spent, and if you've really saved up enough for your future and for emergencies already, you can spend money on things which are meaningful to you. (But be very careful to make sure you actually have saved enough for these things. It's very easy not to.)
    • You can spend it on things to make the world a better place, like good charities, or on your granddaughter's college education.

You probably should be over 18 to invest in the stock market on your own, and you shouldn't expect to take the money out for a decade or more (so ask for detailed advice on your own situation if you're over 50 or so.) But generally the sooner you start investing, the better. You cannot earn any returns on your money if it's not invested.

poolie
  • 2,213
  • 15
  • 21
  • Yeah that answer was awesome. – Kirk Ouimet Dec 21 '10 at 22:51
  • +1, but two comments. 1) inflation is not a guarantee, nor is it guaranteed to be slow. Certainly in the US for many years inflation has been consistent, but if you are planning to hold onto cash for a long time, it's wise to invest in TIPS or other securities with intrinsic value as well to mitigate the risk of inflation. – dimo414 Dec 07 '13 at 16:42
  • You mention mutual funds, but don't cover index funds. There is a large body of evidence that the average mutual fund will be outperformed by a simple index fund. Combined with dollar cost averaging a lay-investor can see solid returns with minimal cost by investing in such funds.
    • – dimo414 Dec 07 '13 at 16:45
  • @dimo414 - Some mutual funds are index funds. (The ones with low fees :D) Mutual funds are a legal structure for buying stocks as a group. Indexing is an approach to picking the stocks. They can work together. –  Dec 11 '13 at 02:14
  • @fennec understood, but I think calling index funds out in particular is reasonable given the detail of your answer. There is a very big difference between mutual funds at large and index funds in particular in terms of historical returns, which is worth mentioning. – dimo414 Dec 11 '13 at 04:02
  • I think your last two points are very important and often underlooked – Aequitas Jan 24 '16 at 23:33