Why Do People Invest in the Stock Market?
People invest in the stock market because the average annual growth of companies in the S&P 500 is 8 percent. Earn money by purchasing stock for long-term investments with tips from a personal financial adviser in this free video on stocks and investments.
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Hi, I'm Roger Groh. We're here today to talk about why people invest in the stock market. Well, have you been to your bank recently and seen what your bank account, savings account pay is? Zero. Have you looked at treasury bills lately? It's zero. And in some cases the yields are negative. Have you looked at what longer term bonds pay? Maybe two percent. Commodities? Boy, they're going down quick. Real estate? Forget it. It's in half of what it was a couple of years ago and really that leaves stock. Over the longer term the rates of growth in earnings in profits from the Standard and Poor's 500 has been eight percent a year. That doesn't mean that they're going to go up eight percent every year. This year in fact they probably won't. But nonetheless, over seventy years that's been the number. As a result, over the next ten years, if you buy a company, and on average earnings and cash flow because both are really important, if they were to increase at an eight percent clip, the underlying value of that business will double. Now, you might say eight percent doesn't mean a whole lot. Find me something that's better. Find me something that's done better over the last seventy years. You're probably hard pressed to do it. Well, why else would people invest in stock. Well, you know, there's an opportunity to make more money than that certainly for companies that are growing faster. I'm going to throw out some names now. I'm not making recommendations to purchase these because these are higher risk investments that have much higher rates of growth. But for instance Google is a very large company which has historically been growing in the forty to fifty percent range as an example. Can they do that forever and ever and ever? No. They can't. Eventually they're only going to grow at eight percent a year, or six or ten, or whatever it might be. But for now, they're in the forty to fifty percent category. Now be very careful. You're bound to suffer more volatility at a higher rate of growth than eight. Anyway, we're all a little bit greedy. Eight percent sounds great. It's been the highest rate of return of any investment category that we've seen over the last seventy years albeit with lots of volatility. And that is why people buy stock.