Over the long term, stock markets give higher returns than other asset classes such as gold and debt. However, investing in stocks is riskier and can lead to loss of capital in the short term. There are several ways to invest in stocks. In this guide, we’ll answer two key questions: how you can invest in stocks, and why investing in stocks pays off in the long term, even with minor investments. Let’s begin by looking at how even a minor investment in stocks can pay off.
Can a minor investment in stocks pay off?
Some investors might not have a huge investible surplus to invest in stocks. However, even if you start with a small amount and invest in good companies, minor investments can pay off. Warren Buffett, arguably the best investor of all time, started with a relatively small sum. A $100 investment in Berkshire Hathaway in 1964 would have turned into a cool $2.74 million at the end of 2019.
More recently, last month, Tesla completed a decade as a listed company. The stock gained has gained 4,125 percent over the period. And even after CEO Elon Musk said in May that he feels the price is too high, the stock has rallied. Berkshire Hathaway and Tesla are just two of many examples of how minor investments in good companies can pay off in the long term. There’s a reason Albert Einstein called compound interest the “eighth wonder of the world.”
How to invest in stocks
To invest in stock markets, you need to have a trading account. You can choose from a discount or full-service broker, take an active or passive approach, and invest through the following instruments:
- IPOs of new companies.
- Shares of publicly traded companies.
- Mutual funds.
- Index funds or ETFs.
The first three instruments are considered active investing, and the last is passive.
Should I invest in stocks or mutual funds?
Investing in stocks requires some degree of expertise and understanding of the company’s business and financial position. You would also need to regularly monitor the company you’re investing in. As Buffett summed up at Berkshire Hathaway’s annual shareholder meeting this year, “I don't think most people are in a position to pick single stocks.”
Some investors who want their money actively managed without getting into the nitty-gritty of picking individual stocks consider mutual funds, where they outsource the job to a fund manager. However, given that 71 percent of active fund managers have underperformed the S&P 500 over the last decade, investors may be better off investing in index funds or ETFs. Between 2005 and 2019, ETFs' total assets rose from $417 billion to $6.1 trillion, according to ETFGI, an independent research company. Considering active fund managers’ underperformance over the last decade, the spike in ETF inflows isn’t a surprise.
Finally, when investing in stock markets, it pays to be greedy when markets are getting shaky. Donald Trump has jumped on the opportunity to tweet that US stock markets have recovered from the March crash. Investors who bought in the crash have seen strong returns.