Whether you follow financial news or not, you inevitably hear regularly about the rise or fall of the markets.
We are told on the news of a huge crash, or a record rise in the stock market.
And the downturns can seem so dire that one can wonder why invest in the stock market and risk losing everything overnight …
Unfortunately, newspaper headlines very often tell only a small part of the story.
And what does not change are the advantages of investing your money on the stock market over the long term.
Investing is an excellent way to make your wealth grow, provided you do it correctly …
In this article, we explain why investing in the stock market can be worthwhile for you , and everything you need to know before you start.
1Investing in the stock market to grow your money
This is usually the main reason why we want to start investing in the stock market: neither more nor less than to make money .
By investing correctly, you have the opportunity to “grow your capital”, that is to say quite simply to make your money work for you.
And beware: we are not talking about “playing on the stock market” , and having fun betting on individual stocks, but rather setting up a long-term investment strategy (this point is also detailed in detail). a little later in the article).
Capital gains and dividends
- Capital gain is the difference between the purchase price and the resale price of an asset such as a stock market share. If you buy, for example, an Apple share, it is in the hope that you will later be able to sell it for more than you bought it – and therefore make a capital gain.
- Dividends are a form of income returned by the company to its shareholders (those who own shares of that company). It is a sum of money which is taken either from the profits or from the reserves of this company. Concretely, you will receive periodically (often annually or every quarter) a sum of money proportional to the number of shares you own in the company in question. Please note : not all companies pay dividends, and they are not systematic either.
Which is better: dividend or capital gain?
Naturally, we can directly say to ourselves that we would prefer to receive regular dividends rather than to receive a capital gain only on resale. But it is not necessarily that simple.
As we told you above, not all stocks, funds or ETFs pay dividends.
Companies that pay dividends are generally large companies with large profits.
This also means that they are often well-developed companies that grow more slowly . But that doesn’t mean you won’t make a profit either.
In the case of an investment strategy based on capital gains, it is then possible to invest in companies with more interesting growth potential.
These companies generally pay little or no dividends, precisely because they want to use their profits for their growth objectives.
You therefore have the possibility of having interesting performances in the long term.
In all cases, it is important to choose a strategy that matches your profile and your investor objective .
And knowing that the best way to grow your money is to reinvest dividends rather than cash them.
If I gave you the choice between giving yourself $ 10,000 , or giving you a euro cent and doubling it every day for 30 days, which of these two options would you choose?
Compound interest is interest you earn … on your interest (#inception).
When you invest money, you earn interest. In the case of compound interest, this interest generated will be added to your capital, and generate interest in turn .
So of course, it is “slightly” rare to find investments with interest of 50% per day for 30 days …
But you don’t need that to take advantage of the power of compound interest.
All you need is correct and regular interest over a long investment period.
Let us take another example : place 5,000 € when you are 25 years old on an investment with a rate of 7% per year (average annual return of the CAC40 for 34 years).
As a reminder, this amount does not take into account the exit tax).
If you start early, save regularly, and invest smart, your money can grow exponentially over time.
And much more than letting him sleep on a Livret A at 0.50% …
or to avoid losing money
Even if you’re not an expert in economics, you’ve probably heard of inflation before.
Explained simply, inflation is a general increase in prices over a period of time .
This means that every euro you own today allows you to buy less than what you could afford to buy before, say 5 years ago. Your purchasing power is therefore reduced.
Overall, it’s a trend that causes things to cost more over time (although it can vary, but we’ll avoid going into details here).
For example, inflation was:
- 1.1% in 2019
- 1.8% in 2018
- 1.0% in 2017
This means that your hard-earned money loses value over time, and allows you to buy less and less.
And when you put all your money in bank books like the Livret A paid at 0.50%, you lose money every year because the interest rate paid does not compensate for inflation .
Of course, it is essential to keep money readily available, including in bank savings books, for example, to place your safety savings.
But once your financial situation is stable, it’s important to consider investing your money in a way that will grow your dollars rather than lose it – and this is where starting to invest in the stock market can really make sense.
In particular because investing money on the stock market can allow you to obtain over the long term higher returns than savings accounts or risk-free investments such as the euro fund.
Of course, the irony, and the difference with passbooks, is that investing in the stock market carries a risk of loss. It is therefore important to educate yourself before getting started and to learn how to invest while respecting your savings profile and your plans.
You should also know that the risk associated with stock market fluctuations decreases the longer your investment horizon. Once again, hence the interest in investing for the long term.
3The passive aspect of investing in the stock market
What is interesting about the stock market is that it is generally easy to invest.
As long as you do it with a long-term objective, and not to seek to become rich in a few months with day trading.
In this article – and indeed all the other articles on Moneylo related to the stock market – we focus on long-term investment and not on speculation .
Investing for the long term is usually much easier than you might think.
And above all, you do not need to constantly have your nose in your accounts (it is even the reverse of what is recommended).
Once you know which tax envelope to choose , and what type of investment you want to make in those envelopes, it can all roll off pretty easily.
Of course, you’ll have some research to do beforehand, and some tweaks along the way.
But unlike other types of investments, like rental investing, everything is almost entirely passive.
4Invest in the stock market to diversify your investments
This is probably not a surprise for you: the French love real estate and “investing in stone”.
The problem is that real estate can easily be over-represented in our portfolios and our assets.
And as investment experts (and your grandmother) say: never put all your eggs in one basket .
It is important to diversify your investments, and investing in the stock market is a great way to do that.
In the event of a fall in a market (real estate, stock market, etc.), the rest of the investments can then allow you to limit the breakage.
Especially since you can start investing in the stock market with very small amounts , which is not necessarily the case with other types of investment.
5To support businesses
Let’s be honest: while no one doubts you have a big heart, supporting businesses and economic growth is probably not the number 1 reason you want to invest.
But this is a fairly pleasant consequence of his investments.
All the more so since it is now possible to invest responsibly, and to specifically support companies with a positive impact on ecology or social issues.
Nalo life insurance, for example, offers to build its portfolio through 100% responsible ETFs. And Goodvest only offers SRI funds that you can select according to the themes that are most important to you.
And contrary to what one may tend to think, socially responsible investment is no less efficient than “traditional” investments.