The benefits of investing in stocks

Source: Edward Jones

The above chart shows how Edward Jones narrows down a list of 65,000 stocks to arrive at the list of 280 stocks it recommends. The chart features two columns: the left-hand column lists the kind of filter that Edward Jones employs on available stocks, while the right-hand column shows the number of stocks remaining after going through the corresponding filter. The chart show that:

  • Filtering by country brings the number of stocks from 65,000 to 18,000
  • Filtering by longevity brings the number of stocks down to 9,000
  • Filtering by financial risk brings the number of stocks down to 8,000
  • Filtering by size brings the number of stocks down to 750
  • Filtering by Analysis brings the number of stocks down to 280

Country: We consider companies primarily based in the U.S., Canada and Europe that follow familiar accounting standards and reporting requirements.

Longevity: The companies we follow need a solid track record — typically at least 10 years of operating history. This means that the company is likely to have faced at least one economic downturn and that management has experience with adversity as well as success.

Financial health: We seek to exclude companies that have a credit quality below investment grade and weak financial strength.

Size: Larger companies usually have a longer track record of success, a broader base of customers and sales, and management depth. We consider companies with at least $2.5 billion in market valuation and at least $1 billion in annual revenue for coverage.

Fundamental analysis: Once companies meet the above criteria, our analysts perform a deep dive into a company’s financial and operating history and project future earnings, cash flow and a fair value of the company.

We believe paying dividends is one important measure of a quality stock. A company’s ability to raise dividends consistently can demonstrate profitability. Companies that have excess cash flow and strong financial positions often choose to pay dividends to attract and reward their shareholders. As a result, they’re often less volatile than stocks that don’t pay dividends.

But beware of reaching for high yields. A higher-yielding stock could be the result of a declining stock price and a signal that investors are concerned about whether the company can continue to pay its dividend. We’ve found these stocks are most at risk of cutting their dividends.

2. Diversify your stock positions

Diversifying your investment portfolio can help protect against market fluctuation. Look at the following factors as you plan to diversify:

Asset allocation: Your portfolio’s asset class mix is one of the most important factors in determining performance. Look at the size of a company (or its market capitalization) and its geographical market — U.S., developed international or emerging market.

When owning individual securities, we recommend that you consider a diversified portfolio of domestic large-cap and mid-cap stocks. To invest in the potentially more volatile asset classes including international, emerging-market and small-cap equities, we favor a diversified investment such as a mutual fund or ETF to help manage risk. Remember, while diversification cannot guarantee a profit or prevent a loss, it can help smooth out performance over time.

Sector allocation: Once you’ve diversified by asset class, we recommend going deeper with diversification across the major market sectors and then industry subsectors. This is because economic cycles and market shocks can affect industries very differently.

U.S. recommended sector weightings

— Update: 07-02-2023 — found an additional article Pros and Cons of Investing in Stocks from the website for the keyword benefits of investing in stocks.

Investing in stocks means that you own a piece of a company that you buy a stock in. As the company grows, you can expect the stock to deliver a return on your investment. What are the pros and cons of investing in the stock market?

Historically, the stock market has delivered generous returns to investors over time, but it also goes down, presenting investors with the possibility of both profits and loss, for risk and return.

Stock Investing Pros and Cons

6 Advantages of Stock Investing

Stock investment offers plenty of benefits:

  1. Takes advantage of a growing economy: As the economy grows, so do corporate earnings. That’s because economic growth creates jobs, which creates income, which creates sales. The fatter the paycheck, the greater the boost to consumer demand, which drives more revenues into companies’ cash registers. ​​It helps to understand the phases of the business cycle—expansion, peak, contraction, and trough.
  2. Best way to stay ahead of inflation: Historically, over the long term stocks have yielded a generous annualized return. For example, as of January 31, 2022, the 10-year annualized return for the S&P 500 was 15.43%. That’s better than the average annualized inflation rate. It does mean you must have a longer time horizon, however. That way, you can buy and hold even if the value temporarily drops.
  3. Easy to buy: The stock market makes it easy to buy shares of companies. You can purchase them through a broker or a financial planner, or online. Once you’ve set up an account, you can buy stocks in minutes. If you’re a small business owner, you may even be able to invest in stocks through your business.
  4. Don’t need a lot of money to start stock investing: Most retail brokers such as Charles Schwab, let you buy and sell stocks commission-free. Some brokers such as Fidelity also don’t require account minimums. If the stock you want to buy is too expensive, you can also buy fractional shares if your broker allows for such investment.
  5. Make money in two ways: Most investors intend to buy low then sell high. They invest in fast-growing companies that appreciate in value. That’s attractive to both day traders and buy-and-hold investors. The first group hopes to take advantage of short-term trends, while the latter expect to see the company’s earnings and stock price grow over time. They both believe their stock-picking skills allow them to outperform the market. Other investors prefer a regular stream of cash. They purchase stocks of companies that pay dividends. Those companies grow at a moderate rate.
  6. Liquidity: The stock market allows you to sell your stock at any time. Economists use the term “liquid” to mean that you can turn your shares into cash quickly and with low transaction costs. That’s important if you suddenly need your money. Since prices are volatile, you run the risk of being forced to take a loss.

6 Disadvantages of Stock Investing

Here are disadvantages to owning stocks:

  1. Risk: You could lose your entire investment. If a company does poorly, investors will sell, sending the stock price plummeting. When you sell, you will lose your initial investment. If you can’t afford to lose your initial investment, then you should buy bonds.
  2. Common stockholders paid last: Preferred stockholders and bondholders or creditors get paid first if a company goes broke. But that happens only if a company goes bankrupt. A well-diversified portfolio should keep you safe if any company goes under.
  3. Time: If you are buying stocks on your own, you must research each company to determine how profitable you think it will be before you buy its stock. You must learn how to read financial statements and annual reports and follow your company’s developments in the news. You also have to monitor the stock market itself, as even the best company’s price will fall in a market correction, a market crash, or bear market.
  4. Taxes: If you sell your stock for a loss, you may be able to get a tax break. However, if you sell your stock for a profit, you’d be liable to to pay capital gains taxes.
  5. Emotional roller coaster: Stock prices rise and fall second by second. Individuals tend to buy high out of greed, and sell low out of fear. The best thing to do is not constantly look at the price fluctuations of stocks, and just check in on a regular basis.
  6. Professional competition: Institutional investors and professional traders have more time and knowledge to invest. They also have sophisticated trading tools, financial models, and computer systems at their disposal.

Read more  Pros and Cons of Investing in Stocks

Diversify To Lower Investment Risk

The Balance / Alison Czinkota

While investing in stocks is riskier compared to bonds, there are ways to reduce your investment risk, such as by diversifying. Diversification means investing in different types of assets, across different sectors so that you spread out your risk. If one type of stock or asset goes down in value but other types of investments go up or stay the same, your entire portfolio is not impacted in a big way.

Here are some ways you can diversify your stock investments:

  1. By investment type: A well-diversified portfolio will provide most of the benefits and fewer disadvantages than stock ownership alone. That means a mix of stocks, bonds, and commodities. Over time, it’s the best way to gain the highest return at the lowest risk.
  2. By company size: There are large-cap, mid-cap, and small-cap companies. The term “cap” stands for “capitalization.” It is the total stock price times the number of shares. It’s good to own different-sized companies because they perform differently in each phase of the business cycle. For example, large cap companies are considered more stable and less susceptible to share price volatility. On the other hand, small cap companies might be riskier and prone to share price volatility but offer greater growth potential.
  3. By location: Own companies located in the United States, Europe, Japan, and emerging markets. Diversification allows you to take advantage of growth without being vulnerable to any single geography.
  4. Through mutual funds and ETFs: Owning mutual funds or exchange-traded funds (ETFs) allows you to own hundreds of stocks selected by the fund manager. One easy way to diversify is through the use of index funds or index ETFs.

The Bottom Line

There are clear benefits and drawbacks of investing in stocks. Historically, stocks have generated generous returns over the long-term but investing in stocks also comes with significant risk. Risks of stock investing can be spread across different stocks, sectors and geographies, in a process called diversification.

How much of each type of investment should you have? Financial planners suggest you establish your asset allocation based on your financial goals and where the economy is in the business cycle.

Frequently Asked Questions (FAQs)

— Update: 09-02-2023 — found an additional article The Basics of Investing In Stocks from the website for the keyword benefits of investing in stocks.

What Are Stocks?

Stocks are a type of security that gives stockholders a share of ownership in a company.

Companies sell shares typically to gain additional money to grow the company. This is called the initial public offering (IPO). After the IPO, stockholders can resell shares on the stock market.

Stock prices rise or fall and are typically driven by expectations of the corporation’s earnings, or profits.

Types Of Stocks

There are two main kinds of stocks, common stock and preferred stock.

  • Common Stocks
    Common stock entitles owners to vote at shareholder meetings and receive dividends.
  • Preferred Stocks
    Preferred stockholders usually don’t have voting rights but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.

Common and preferred stocks may fall into these commonly used categories:

  • Growth Stocks
    Growth stocks have earnings growing at a faster rate than the market average. They rarely pay dividends and investors buy them in the hope of capital appreciation. A start-up technology company is likely to be a growth stock.
  • Income Stocks
    Income stocks pay dividends consistently. Dividends are a portion of the company’s earnings paid to shareholders. Investors buy them for the income they generate. An established utility company is likely to be an income stock.
  • Value Stocks
    Value stock shave a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio may reflect the fact that they have fallen out of favor with investors for some reason. People buy value stocks in the hope that the market has overreacted and that the stock’s price will rebound.
  • Blue-Chip Stocks
    Blue-chip stocks are shares in large, well-known companies with a solid history of growth. They generally pay dividends.

Potential Benefits Of Investing In Stocks

The potential benefits of investing in stocks include:

  • Potential capital gains from owning an stock that grows in value over time
  • Potential income from dividends paid by the company
  • Lower tax rates on long-term capital gains

Potential Risks Of Stocks

The potential risks of investing in stocks include:

  • Share prices for a company falling, even to zero
  • If the company goes broke, you may be the last to be paid, so you may not get your money back
  • The value of your shares will go up and down, and the dividend may vary

Buying And Selling Stocks

The following are the most common ways to buy stocks:

  • Direct Stock Plans Through Companies
    Some companies allow you to buy or sell their stock directly through them without using a broker. Some companies limit direct stock plans to employees of the company or existing shareholders. Some require minimum amounts for purchases or account levels.
  • Dividend Reinvestment Plans
    These plans allow you to buy more shares of a stock you already own by reinvesting dividend payments into the company. You must sign an agreement with the company to have this done. Check with the company or your brokerage firm to see if you will be charged for this service.
  • Discount Or Full-Service Broker
    Brokers buy and sell shares for customers for a fee, known as a commission. Many brokers run websites where you can buy stocks.
  • Stock Funds
    Stock funds are another way to buy stocks. These are a type of mutual fund that invests primarily in stocks. Stock funds are offered by investment companies and can be purchased directly from them or through a broker or adviser.

Researching Stocks

Before investing in a stock it’s a good idea to research the company and the stock’s performance history.

Information you should consider researching include:

  • Annual Reports
    One of the best sources of information is a company’s annual report. Review a company’s annual report to learn about its business activities, whether it’s making a profit or loss, and the company’s strategy for the future..
  • Prospectus
    Companies issuing shares are required to file a prospectus with the U.S. Securities and Exchange Commission. A prospectus is a formal legal document that gives details about the investment.
  • Stock Reports
    There are various reports available about a stock’s performance. Ask your stock broker or investment adviser for more information.

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Work With Licensed Professionals and Registered Products

Investment professionals need to be licensed with the Washington Department of Financial Institutions (DFI). In addition, most investment products sold need to be registered with DFI. To check the licensing status and to find out if there are any complaints against an investment professional or investment product, contact the Washington State Department of Financial Institutions at 1.877.RING DFI (746-4334).

If you live outside of Washington state, contact your state securities regulator.

Questions you should ask about the investment and professional selling the investment:

  1. Is the investment registered?
  2. Have investors complained about the investment in the past?
  3. Have the people who own or manage the investment been in trouble in the past?
  4. Is the person selling the investment licensed in my state?
  5. Has the person selling the investment been or trouble with the state in the past?

Learn More

— Update: 10-02-2023 — found an additional article Benefits of Holding Stocks for the Long-Term from the website for the keyword benefits of investing in stocks.

A long-term investment strategy entails holding investments for more than a full year. This strategy includes holding assets like bonds, stocks, exchange-traded funds (ETFs), mutual funds, and more. Individuals who take a long-term approach require discipline and patience, That’s because investors must be able to take on a certain amount of risk while they wait for higher rewards down the road.

Investing in stocks and holding them is one of the best ways to grow wealth over the long term. For example, the S&P 500 experienced annual losses in only 11 of the 47 years from 1975 to 2022, demonstrating that the stock market generates returns much more often than it doesn’t.

Better Long-Term Returns

The term asset class refers to a specific category of investments. They share the same characteristics and qualities, such as fixed-income assets (bonds) or equities, which are commonly called stocks. The asset class that’s best for you depends on several factors, including your age, risk profile and tolerance, investment goals, and the amount of capital you have. But which asset classes are best for long-term investors?

If we look at several decades of asset class returns, we find that stocks have generally outperformed almost all other asset classes. The S&P 500 returned an average of 11.82% per year between 1928 and 2021. This compares favorably to the 3.33% return of three-month Treasury bills (T-bills) and the 5.11% return of 10-year Treasury notes.

Emerging markets have some of the highest return potentials in the equity markets, but also carry the highest degree of risk. This class historically earned high average annual returns but short-term fluctuations have impacted their performance. For instance, the 10-year annualized return of the MSCI Emerging Markets Index was 2.89% as of April 29, 2022.

Small and large caps have also delivered above-average returns. For instance, the 10-year return for the Russell 2000 index, which measures the performance of 2,000 small companies, was 10.15%. The large-cap Russell 1000 index had an average return of 13.57% for the last 10 years, as of May 3, 2022.

Ride Out Highs and Lows

Stocks are considered to be long-term investments. This is, in part, because it's not unusual for stocks to drop 10% to 20% or more in value over a shorter period of time. Investors have the opportunity to ride out some of these highs and lows over a period of many years or even decades to generate a better long-term return.

Looking back at stock market returns since the 1920s, individuals have rarely lost money investing in the S&P 500 for a 20-year time period. Even considering setbacks, such as the Great Depression, Black Monday, the tech bubble, and the financial crisis, investors would have experienced gains had they made an investment in the S&P 500 and held it uninterrupted for 20 years.

While past results are no guarantee of future returns, it does suggest that long-term investing in stocks generally yields positive results, if given enough time.

Investors Are Poor Market Timers

Let’s face it, we’re not as calm and rational as we claim to be. In fact, one of the inherent flaws in investor behavior is the tendency to be emotional. Many individuals claim to be long-term investors until the stock market begins falling, which is when they tend to withdraw their money to avoid additional losses.

Many investors fail to remain invested in stocks when a rebound occurs. In fact, they tend to jump back in only when most of the gains have already been achieved. This type of buy high, sell low behavior tends to cripple investor returns.

According to Dalbar's Quantitative Analysis of Investor Behavior study, the S&P 500 had an average annual return of just over 6% during the 20-year period ending Dec. 31, 2019. During the same time frame, the average investor experienced an average annual return of about 2.5%.

There are a few reasons why this happens. Here are just a couple of them:

  • Investors have a fear of regret. People often fail to trust their own judgment and follow the hype instead, especially when markets drop. People tend to fall into the trap that they’ll regret holding onto stocks and lose a lot more money because they drop in value so they end up selling them to assuage that fear.
  • A sense of pessimism when things change. Optimism prevails during market rallies but the opposite is true when things turn sour. The market may experience fluctuations because of short-term surprise shocks, such as those related to the economy. But it’s important to remember that these upsets are often short-lived and things will very likely turn around.

Investors who pay too much attention to the stock market tend to handicap their chances of success by trying to time the market too frequently. A simple long-term buy-and-hold strategy would have yielded far better results.

Lower Capital Gains Tax Rate

Profits that result from the sale of any capital assets end up in a capital gain. This includes any personal assets, such as furniture, or investments like stocks, bonds, and real estate.

An investor who sells a security within one calendar year of buying it gets any gains taxed as ordinary income. These are referred to as short-term capital gains. Depending on the individual’s adjusted gross income (AGI), this tax rate could be as high as 37%.

Any securities that are sold after being held for more than a year result in long-term capital gains. The gains are taxed at a maximum rate of just 20%. Investors in lower tax brackets may even qualify for a 0% long-term capital gains tax rate.

Less Costly

One of the main benefits of a long-term investment approach is money. Keeping your stocks in your portfolio longer is more cost-effective than regular buying and selling because the longer you hold your investments, the fewer fees you have to pay. But how much does this all cost?

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As we discussed in the last section, you save on taxes. Any gains from stock sales must be reported to the Internal Revenue Service (IRS). That ends up increasing your tax liability, which means more money out of your pocket. Remember, short-term capital gains can cost you more than if you hold your stocks for a longer period of time.

Then there are trading or transaction fees. How much you pay depends on the type of account you have and the investment firm that handles your portfolio. For instance, you may be charged a commission or markup, where the former is deducted when you buy and sell through a broker while markups are charged when the sale is directed through their own inventory. These costs are charged to your account whenever you trade stocks. This means your portfolio balance will drop with every sale you make.

Compounding With Dividend Stocks

Dividends are corporate profits distributed by companies with a track record of success. These tend to be blue chips or defensive stocks. Defensive stocks are companies that do well regardless of how the economy performs or when the stock market drops.

These companies pay regular dividends—usually every quarter—to eligible shareholders, which means that you get to share in their success. While it may be tempting to cash them out, there’s a very good reason why you should reinvest the dividends into the companies that actually pay them.

If you own any bonds or mutual funds, you’ll know about how compound interest affects your investments. Compound interest is any interest calculated on the principal balance of your stock portfolio and any earlier interest you earned. This means that any interest (or dividends) that your stock portfolio accumulates compounds over time, thereby increasing the amount of your account in the long run.

Best Types of Stocks to Hold for the Long-Term

There are several things to consider when you want to purchase stocks. Consider your age, risk tolerance, and investment goals, among other things. Having a handle on all of this can help you figure out the kind of equity portfolio you can create in order to meet your goals. Here’s a general guide you can follow as a starting point that you can tailor to your own situation:

  • Choose index funds. These are ETFs that track specific indexes, such as the S&P 500 or the Russell 1000, and trade just like stocks. But unlike stocks, these funds come with a lower cost and you won’t have to pick and choose specific companies in which to invest. Index funds give you similar returns to the indexes they track.
  • Consider dividend-paying stocks. These types of stocks can help add value to your portfolio, especially when dividends are reinvested.
  • Companies with high growth can boost your portfolio. Growth stocks tend to be associated with companies that are able to generate a significantly high revenue at a faster rate than others. They are also better equipped to deliver strong earnings reports. Keep in mind, though, that this degree of growth comes with a higher level of risk, so you’ll have to be a little savvier than novice investors if you want to go this route.

As always, it's a good idea to consult with a financial professional, especially if you're new to the investment world.

The Bottom Line

People who invest in stocks can benefit from many different trading strategies. Investors who have more experience and a higher amount of capital at their disposal may be able to ride the market waves and make money using short-term trading techniques. But that may not work for those who are just starting out or aren't able to tolerate too much risk. Holding stocks for the long-term can help you ride the highs and lows of the market, benefit from lower tax rates, and tend to be less costly.

— Update: 10-02-2023 — found an additional article Key Benefits of Investing In Stocks from the website for the keyword benefits of investing in stocks.

Stocks can be a valuable part of your investment portfolio. Owning stocks in different companies can help you build your savings, protect your money from inflation and taxes, and maximize income from your investments. It’s important to know that there are risks when investing in the stock market. Like any investment, it helps to understand the risk/return relationship and your own tolerance for risk.

Let’s look at three benefits of investing in stocks.

Build. Historically, long-term equity returns have been better than returns from cash or fixed-income investments such as bonds. However, stock prices tend to rise and fall over time. Investors may want to consider a long-term perspective for their equity portfolio because these stock-market fluctuations do tend to smooth out over longer periods of time.

Benefits of investing in stocks

Protect. Taxes and inflation can impact your wealth. Equity investments can give investors better tax treatment over the long term, which can help slow or prevent the negative effects of both taxes and inflation.

Maximize. Some companies pay shareholders dividends1 or special distributions. These payments can provide you with regular investment income and enhance your return, while the favourable tax treatment for Canadian equities can leave more money in your pocket. (Note that dividend payments from companies outside of Canada are taxed differently.)

Different Stocks, Different Benefits

The two main types of equity investments below can each offer investors different benefits.

1. Common shares

Common shares are the most (you guessed it!) common type of equity investment for Canadian investors. They can offer:

Capital growth. The price of a stock will go up or down over time. When it goes up, shareholders can choose to sell their shares at a profit.

Dividend income. Many companies pay dividends to their shareholders, which can be a source of tax-efficient income for investors.

Voting privileges. The ability to vote means shareholders have some measure of control over who runs the company and how.

Liquidity. Typically, common shares can be bought and sold more quickly and easily than other investments, such as real estate, art or jewellery. This means investors can buy or sell their investment for cash with relative ease.

Advantageous tax treatment. Dividend income and capital gains are taxed at a lower rate than employment income and interest income from bonds or GICs.

2. Preferred shares

Preferred shares can offer investors the following benefits:

Reliable income stream. Generally, preferred shares come with a fixed dividend amount that must be paid before any dividends are paid to common shareholders.

Higher income. Compared to common shares, preferred shares tend to pay higher dividends. (Note: preferred-share dividends come with the same advantageous tax treatment as dividends on common shares.)

Variety. There are many types of preferred shares, each with different features. For example, some allow for unpaid dividends to accumulate, while others can be converted into common shares.

Benefits of investing in stocks

The Advantages of Dividends

Dividends are a way for companies to distribute a portion of their profits to shareholders. Typically, dividends are paid in cash on a quarterly basis, although not all companies pay dividends. For example, companies that are still growing might choose to reinvest their profits back into their business to help grow it.


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About the Author: Tung Chi