Stock market investments have the potential to make you very rich. But if you invest in the stock market, you could also lose a substantial portion of your funds.
In this article, you’ll learn:
- As a Business Owner, Is It a Good Idea to Invest in the Stock Market?
- How Much Could You Make Investing in the Stock Market?
- Pros of Investing in the Stock Market
- Cons of Investing in the Stock Market
- Tools and platforms to invest in the stock market
- What do you need to know before investing in the stock market? (Dos and Don’ts)
- What are other good options to invest your money?
As a Business Owner, Is It a Good Idea to Invest in the Stock Market?
Let’s start with an illustrative example based or real data. Consider a person who bought Apple stock about three years ago. In July 2016, a share in Apple Inc. was available at less than $100. Today, the stock trades at a value in excess of $200. You would have doubled your money in three years.
Now, think about another individual – one who bought stock in the department store chain, Macy’s Inc. in July 2016. Here is how the investment has performed:
The stock price of Macy’s Inc.
July 2016: $36
August 2019: $15
More than half the original sum has been wiped out over three years. Apple’s stock has climbed in value as the company has increased the sales of its smartphones and diversified into services like Apple Music. Macy’s, on the other hand, has lost out as people have moved away from brick-and-mortar stores to online purchases.
You can see that if you want to invest in the stock market, you need to be willing to risk your money. While there are opportunities to make high returns, you could also see a sharp decline in the value of your investment.
If you have excess cash, which you won’t need in the foreseeable future, the stock market can provide an excellent opportunity to grow your wealth.
How Much Could You Make Investing in the Stock Market?
Let’s understand how much money it’s possible to make if you invest in the stock market. We can do this by examining the performance of the Dow Jones Industrial Average. This is a stock market index that indicates the current value of the shares of 30 of the largest publicly traded US companies.
Here’s a chart illustrating the increase in the Index over the last ten years.
10-year historical chart for the Dow Jones Industrial Average
You can see that there is a consistent upward trend in share prices over the last decade. But there are lots of ups and downs, too. If you invest, say, $10,000 in the stock market and within a few months the value falls to half that amount, how will you feel? You’ll probably wish that you had put the money in your bank or invested it in your business.
So, should you invest in the stock market? Here’s a list of pros and cons to help you answer this question:
Pros of Investing in the Stock Market
- Possibility of making high long-term returns – over the last 25 years, the Dow Jones Industrial average has provided an annualized return of almost 8%. The S&P 500, an index that tracks the stock prices of 500 large American companies, has provided a slightly higher return.
- Income from dividends – when you invest in the stock market, there are two ways in which you can benefit. The first, of course, is that the value of your investment may go up. Additionally, you would be entitled to dividends from the company that you have bought shares in. It’s possible to make a return of between 2% and 6% every year from dividend payouts alone. However, you must remember that there’s no guarantee that a company that has a history of paying dividends will continue to make payouts.
- It’s easy to invest – simply open an account with a broker, fund the account, and place your order.
Cons of Investing in the Stock Market
- There’s a high degree of risk involved – stock markets are volatile. You may buy at the peak of the market and watch helplessly as your investments lose value.
- Putting funds into stocks when you need them for some other purpose – this is a mistake that many people make. It’s important to create an emergency fund before you think about investing in the stock market. You may suddenly need money to take advantage of a new business opportunity. Or, you may face a situation where a customer who owes you a large sum does not pay. There may be a medical emergency in the family. How will you meet these expenses? If your funds are blocked in the stock market, you may have to sell at a loss to access them.
- Choosing the right stock can be difficult – professional stock market investors devote a great deal of time and effort to identifying good investment opportunities. As a small business owner, you probably won’t have the skills or resources to select stocks that have the potential to appreciate in value.
Tools and Platforms to Invest in the Stock Market
If you’re willing to risk your money, the next step would be to understand how to invest in the stock market. One option is to buy shares in companies that you think have the potential to see an appreciation in their valuations.
But what if you think that buying individual stocks is too risky? Is there any way to invest in the stock market without having to select the companies that you wish to invest in? Fortunately, there is. Mutual funds and exchange-traded funds (ETFs) are excellent options for new investors.
A mutual fund pools money from many investors and buys stocks. A small investment could give you exposure to hundreds of companies. An ETF is similar to a mutual fund. However, it tracks a specific index like the Dow Jones Industrial Average or the S&P 500. ETFs usually carry lower costs than mutual funds.
What Do You Need to Know Before Investing in the Stock Market?
Ready to take the plunge? Here is a list of dos and don’ts to follow:
- Keep track of your expenses – when you buy or sell shares, mutual funds, or ETFs, there is a cost involved. While this is usually a small sum, its impact could be significant over an extended period. This example will illustrate this point: An investment of $100,000 that earned a return of 6% per year would grow into $430,000 over 25 years. Now, assume that there is a cost of 2% every year. (Some mutual funds levy an annual charge in this range.) If you build in the impact of this 2% annual charge, the sum at the end of 25 years would be only $260,000. You would have lost $170,000 to costs.
Costs can eat away at your expenses
- If you are buying an individual stock, you should know the price at which you plan to sell – determine your sale price before you make the purchase. Say, you buy a stock at $100. Soon after you make the purchase, the price falls to $95. Will you wait for it to go back up or will you sell and take your losses? Similarly, if the price goes up from $100 to $105, will you sell? Or, are you looking for a greater profit? You must make these decisions before you make the investment. If you don’t, you will likely postpone the sale. This could lead to losing the profit you have made. If prices fall and don’t recover, your losses may keep mounting.
- Diversify your investments – don’t make the mistake of buying only one stock. Buy several in different industries. Better still, invest in a mutual fund or an ETF. This will help to spread out your risk.
- Don’t try to time the market – every individual would like to invest in the stock market when it is at its lowest and sell at the peak. However, it’s practically impossible to get this right.
- Don’t worry too much if prices fall – stock markets are volatile by nature. Prices will rise and fall every day. Stick with your original investment plan and don’t get swayed by day-to-day changes in prices.
- Don’t invest in the stock market with borrowed funds – if you do, you’ll have to worry about making enough profit to pay the interest on the loan as well as a surplus for yourself. Additionally, if the markets fall after you invest, how will you repay the loan?
Access here a step-by-step guide to invest in the stock market
What Are Other Good Options to Invest Your Money?
For many small business owners, investing in their own businesses is a far better option than deploying funds in the stock market. If you see an opportunity to expand your scale of operations or venture into a new market, the returns could be far higher than what you would make by buying stocks.
But what if you don’t have the money to grow your business? A small business loan from Camino Financial could provide you with the funds you need. This is a safe investment: we offer fixed interest rates on loans that have payback periods that could stretch up to five years. Your monthly payments will also be fixed and never change, so you don’t get unpleasant surprises. Our business loans specialists will study your profile to make sure you bet an optimal return on investment, allowing you not only to pay back your loan comfortably but also to grow your business as planned. Use our business loan calculator to determine your monthly installments for different loan periods.
At Camino Financial, our motto is “No business left behind.” Our business loan specialists will guide you in the loan application process and ensure that you have the best possible chance for approval. Apply today to see if you qualify for a loan.
Are Recessions a Good Time to Invest in Stocks?
Investing during a recession is a good idea as long as you have enough capital to do it (without jeopardizing your finances if this money is lost) and if you use the right approach.
During a recession, the prices of stocks, bonds, mutual funds, real estate start dropping at alarming rates. This can be bad news if you already have an investment portfolio (although, of course, the market will gradually recover). But if you haven’t made any investments in the stock market, you are in front of a rather unique opportunity: you can make investments relatively cheap, investments that during a normal period would be much more expensive. This is a unique opportunity to strengthen your finances.
That is why a recession may be the best time to start investing in the stock market: it allows you to buy with little money so that, later, you can sell the stocks for more money. It is important to note that these prices won’t recover quickly, the process can take several years (even up to 7), so you should think of this as a long-term investment.
If you decide to invest during a recession, you need to be very patient and have a high tolerance to stress: prices will constantly fluctuate, they might even take a big drop a few days after you buy them. But remember: you are playing a long game and you must resist the urge not to sell immediately. Be patient!
Another important thing you should know is which assets you should invest in. We recommend that you do not invest in highly leveraged, cyclical, or speculative assets.
Finally, don’t forget that when the recession ends, you will have to readjust your strategy.
The bottom line
Stock market investments can be a good option, but they’re not for everyone. If you plan to buy stocks or invest in a mutual fund or an ETF, do it with the money that you won’t need for several years. For many small business owners, investing in their firms is a far better decision.