10 Reasons That Stocks Are The Best First Investment

By Joshua Mou

 

Every new investor will be faced with the decision of what to invest in first. There are a dizzying number of options from savings accounts to real estate to bonds to CDs to a family member’s business to lottery tickets to gold to paintings to publicly-traded company stocks. There is a place for most of these options. However, for those who want to learn how to invest, individual stocks have advantages that make them the best first investment.

Before going further, I recognize that very few people will complete the steps to learn how to invest. I estimate that nine out of ten people will not succeed in learning how to invest in individual investments. That is just the truth. Typically, people fail at investing because they lose interest, give up, do not do the necessary research, or get impatient. If at any point, you want to stop reading, then you should feel no shame. Most people allow something to get in the way. For those who decide that investing is not their cup of tea but still want to their money to work for them, I encourage you to at least read through point number one. Point number one discusses a way to invest in a good asset that takes no thought at all. However, for those few people who do want to learn, this article will also introduce a low-cost and profitable education.

Early in an investor’s journey, the learning curve is the steepest. While even seasoned investors have something to learn, new investors have EVERYTHING to learn. However, if you persist, then you will find that investing gets easier and easier. The lessons you will learn in stock investing will serve you for the rest of your life. This article introduces the first step of your journey.

Here are ten reasons why publicly-traded stocks are the best first investment.

1. The Opportunity To Invest Mindlessly

For those who do not have time to learn or to do any investing work, one could simply buy a stock fund—an index fund—that owns all the stocks in the US market. Such an index fund should charge very low fees that are less than 0.25% of the investment. Owning a broad-based US index fund that copies the entire US stock market will provide good investment returns. This one investment fund is sufficient for most people who are otherwise responsible with their finances. In fact, such an index fund regularly trounces many other common types of investments. I recommend either the Vanguard Total Stock Market Index Fund (Ticker Symbol: VTSMX), but all of the major investment firms have similar index funds. Non-US investors may want to investigate broad index funds that cover their country or that cover the world if their country has a volatile economy.

One caveat, is that investors NEED to invest mindlessly if they use stock funds of any kind. The reason is that stock market news tempts investors to buy and sell their funds at inappropriate times, which causes their returns to go down or even become losses. There are too many reasons for this phenomenon to discuss in this article, but if an investor is curious then he or she is probably a good candidate to continue in our educational adventure. Fortunately, this requirement to be “hands off” works perfectly for those who do not have the time or desire to think about investing.

Still, I strongly encourage you to look further than just index funds because their educational utility is very limited. However, if that is all the investing that you want to do then index funds at least illustrate the overall wealth building capability of stocks and enterprising companies. Index funds are also good places to park your investing money while you continue your financial education.

2. Strong Economies Breed Strong Stocks

The US, my home country, has a stable and growing economy. Such a track record means that there is a healthy pool of successful companies from which to invest. The stable government means that there is less risk of companies being harmed by a coup, a shooting war, or the whims of a dictator. Even when politicians perform harmful acts, there have always been US companies that have overcome such obstacles. A growing US population provides a constant supply of business for domestic companies. A developed infrastructure provides companies with the environment in place to carry out their operations. The financial system is mature, which provides businesses with money to grow their operations. For all these reasons, the US stock market has one of the best long-term track records of growth among not only global stock markets but also among non-stock investments as well. Investors in other countries with strong economies should also expect to find great companies and stocks.

3. Easy Diversification

Most household budgets are capable of owning many different investments in the stock market. Having a diverse set of investments prevents a single mistake from destroying all of your investment portfolio. When there are two or more investments, then the failures can be averaged up by more successful ones. Contrast an investment such as real estate. A down payment on a single investment property is usually in the thousands of dollars. For a mere $100, an investor could own the stocks of five different companies.

4. Opportunities In Every Industry

There are stocks of companies in every industry within an investor’s realm of expertise. I grew up watching movies, going to theme parks, and watching sports channels. Fortunately, I found Disney stock, which makes great movies, has great theme parks, and owns one of the most popular sports channels. I have worked at many hospitals, and I have a good feel for the healthcare industry. Fortunately, there are hundreds of drug companies, hospital companies, insurance companies, and health service companies that sell their stock. I was able to find stocks that fit the knowledge that I already had, saving me a step in the investment process. I guarantee that you will find stocks that fit your area of expertise. Using existing knowledge will allow people to skip ahead in the learning process. Specialized expertise will help investors see problems in an investment earlier than other people, which helps to decrease risk. Additionally, specialized expertise will help people spot good opportunities earlier than others as well.

5. Transferable Knowledge

The lessons learned from stock investing are transferable to real estate investing, to private business investing, to bonds, or to any other type of investing. Long-term stock investing clearly shows what factors make a good investment, what factors increase risk of failure, and what investing behaviors work the best. Investors can use their stock investing knowledge as a foundation from which to learn the nuances of any other investment.

6. Opportunities Always Exist

There are always individual stocks that sell for bargain prices. Even if the general stock market is over priced, there is always a company or sector of the market that is out of favor. Therefore, investors do not have to wait for opportunities as long as they are willing to search for them. Certainly, that does not mean that it is easy to find those bargains. For instance, several years ago, cloud computing software companies went on sale, but I did not understand them enough to know that they were a bargain, so I missed that opportunity. But, I knew enough about a couple of drug companies that were bargains, so I bought them at a time when most other sectors were too popular. Likewise, other investors search for bargain stocks while they pass on stocks that are overpriced.

7. Easy In, Easy Out

Most stocks tend to be very easy to buy and sell. Almost every stock has someone willing to buy or sell during market trading hours. While one may not always get a desirable price, at least someone will buy you out. This is much harder to do with a private business, a piece of property, or even certain investment funds—particularly if they are doing poorly. Investors never have to be stuck with a stock that they cannot sell.

8. Low Cost to Invest

Over the last decade, transaction fees to buy or sell stocks have dropped to less than $5 per transaction at most brokerage companies, the companies that facilitate stock trades for investors. The prices of most individual stocks are less than $100 per share with most in the $20-$60 range. A few brokerage companies even allow investors to purchase partial shares of stock. A stock investor can easily take $20 and buy a stock that could provide profits for the rest of his or her life.

9. Stock Investing Is Not A Job

Once an investor puts in the initial work to choose a stock, typically a check up is only needed every 3 months. Some successful investors even advise doing check ups only once a year. Please note the difference between trading stocks and investing in stocks. Trading is a job. Trading requires a set of skills that can be just as difficult to learn as writing a computer program or becoming a doctor. Trading requires constant attention to the stock market. I can illustrate the difference with pears. Investing in a pear tree requires researching the right location and the right variety of pear tree. After planting, the pear tree just needs sun and water to produce a reoccurring supply of pears. The tree owner does not need to keep moving the tree around or keep switching the variety. Trading pears requires actively buying and selling the pears. When the trader is not buying and selling, then no money is made. The trader has to constantly monitor supply and demand for pears, manage inventory, and time his trades for profit. Between trading and investing, only one sounds like a job. Stock investing allows people to make money without ever having a hand in the underlying businesses; this truly is passive investing.

10. Easy Access To Information

Publicly-traded companies are required to publish their financial reports every 3 months. These reports include updates on their business operations. The information is available for free to anyone with access to the internet. Free! Such access to complete business reports is rare with other types of investments. It is significantly more work to get reliable and complete financial reports for an investment in a private business venture or for an investment property. Public companies, on the other hand, publish a standard set of financial reports right on their company websites. These reports follow strict accounting guidelines and are highly scrutinized by the investment community. It takes less than five minutes to find and to download a company’s quarterly and annual reports. Some companies even have executives that take personal calls from individual investors. This convenience removes a huge barrier to investing—and to learning. If information is the most valuable commodity, then stocks consistently provide the most information to the investor.

 

Many people do not know how or where to start investing. The stock market offers an excellent platform to begin a profitable journey. In future articles, I will describe the steps for choosing and buying stocks. I encourage those who want to take the next step in their investing education to follow along.

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