Why do people invest in stocks?
INCOME OPPORTUNITIES,  Stock Market

Why Do People Invest In Stocks? Here Are Five Big Reasons

Why do people invest in stocks? Isn’t that for rich people only? Can I invest in the stock market with little capital? What are the prerequisites in stock market investing?

Those were few of my questions way back. I know we share the same questions, but we will start unfolding the answers bit by bit. This is the start of my blog series about stock market investing and this is just a part of the introduction.

But before revealing the reasons why people invest in stocks, let me first share a bit of a background why I engaged myself into investing – particularly stock market investing.


The reason why I engaged myself into investing

Since I entered the corporate world last 2017, I became so sensitive with my finances. I once struggled financially during my academe years, making me more appreciative of the money I earning.

Here in the Philippines, once you graduate and get a job, you are expected to give back to your family financially.

I know my fellow breadwinners can relate. But it is more of an honor rather than a burden knowing that you can already help your family financially, isn’t it?

I, however, can’t help but admit that having financial responsibilities to prioritize is hard. It even went to a point wherein I lived from paycheck to paycheck.

I remember depriving myself from buying things I like during my first months as a professional just to have some savings.

I became so addicted to saving money without getting much positive results. This left me thinking, will I live like this all my life?

When such a realization hit me hard, I realized I need to increase my income in order to save more. I had a few side hustles back then, but I eventually came to realize that those weren’t enough.

I have to find other ways to realize my long-term financial plans without draining all of my time and energy – and that is through investing. This is, perhaps, one of the biggest reasons why people invest as well.


Read More: Are you prepared to invest?


When did I learn about stock market investing?

I learned about the idea of the stock market during my review days for my board exam. I heard one of my review mentors saying his stock market account had already reached a million pesos. Waw! Can the stock market really make you a millionaire?

So when it came to a point I realized I need to commence my investing journey, the very first investment which came to my mind was the stock market.

That time, I never knew how and where to begin, but with the help of my manager and a co-worker who are stock market investors, I eventually had a glimpse of what stock market investing is.

My manager recommended reading the book “My Maid Invests in Stock Market and Why You Should Too.” This book was authored by Brother Bo Sanchez, a Filipino pastor and a stock market investor. If you are still a neophyte, I highly suggest reading that book. The FREE pdf file can be downloaded HERE.

When I gained enough composure, I fearlessly involved myself in the actual stock market investing. Every day was a learning experience for me. I may have several setbacks, but that didn’t stop me from educating myself more about the stock market.

I also involved myself in different communities sharing the same drive to unleash their potential as stock market investors. And as time went by, I came to realize that there are greater reasons why people are getting more interested in stock market investing.


Why do people invest in stocks?


1. Because of those people who became successful in stock market investing

I admit I wouldn’t bother having sleepless nights just to learn more about the stock market, if not because of those people who became successful investing to it. I wouldn’t waste my time on things which cannot give me any returns.

One of the most successful people who became rich in the stock market is Warren Buffet.

According to Forbes, Buffet’s net worth is $84.8 Billion as of June 16, 2019. He’s a self-made billionaire, whose wealth mainly came from the stock market.

I personally know people from the Philippines who became millionaires because of stock market investing as well. And I know, at some point, most people who invest in the stock market right now entered the market because of those success stories.


2. To create a portfolio income

There are two major types of income: active income and passive income.

Basically, an active income is something that requires a significant amount of work. You are paid for the service you offer. It may come from working, selling, or anything that requires you to work your ass off.

No work? No pay. As simple as that. Unless you’re on a paid leave, oops.

Passive income, on the other hand, is something that is earned with little to no effort at all. Passive income is usually earned on a regular basis without any additional effort on your part.

The best example of this is a real estate investment. As a rule of thumb, passive income requires great efforts at first before reaching that point wherein you just have to sit back, relax, and earn.

Now, how about portfolio income?

Portfolio income is something that comes from your investments such as investments (like stocks and mutual funds), dividends, interest, and capital gains. Some people may consider this as one of the major types of incomes next to active income and passive income, but I personally consider portfolio income as a subset of passive income. After all, stock market investing just requires minimal efforts.

This photo best describes how portfolio income sets apart from active income and passive income:

Why do people invest in stocks? To create a portfolio income

You have to keep in mind though that before successfully gaining passively from the stock market, you still have to exert more efforts on your active income. Stock market investing still requires a significant amount of capital before having substantial gains.


Read More: Four Ways to Invest in the Stock Market


3. To beat inflation

Ten years ago, a thousand pesos could still buy you a basket of goods. But now, you can’t even barely purchase a bag of merchandise with the same amount.

The culprit? Inflation.

In economics, the inflation rate is the decrease in the purchasing power of a country’s currency. The rise in the prices of goods and services is one of the common effects of inflation.

Why do people invest in stocks? To beat inflation.
As the time advances, your 1,000 is losing its purchasing power.

To put it simply, inflation rate makes your money’s value lesser over time.

Now, how would that relate to stock market investing?

Suppose you have 10,000 pesos and the annual inflation rate is 5%. 

Why do people invest in stocks? To beat inflation.

You decided to keep that 10,000 pesos to your piggy bank. After a year, its purchasing power will go down to 9,500 pesos. That is a 500-peso (5% of 10,000) value decrease of your money due to inflation!

But what if you have decided to put your money in the bank?

Why do people invest in stocks? To beat inflation.

Though banks offer 1% annual interest for savings accounts per year, you are still losing your monetary value as inflation rate exceeds the interest rate you are earning from the bank. 

On average, the annual inflation rate of the Philippines is 3-5%. The trick to beat inflation? Find yourself an investment that could exceed that annual inflation rate. Thus, the investment you should look for should be giving you more than 5% of annual interest.

Though the returns are not guaranteed, financial analysts suggest that stock market investors may earn 10% annually. Now, what will happen if you invest your PHP 10,000 in the stock market?

Why do people invest in stocks? To beat inflation.

Say you are earning 10% from your stocks investments and the inflation rate is 5%. (+10% – 5% = +5%). That would be 5% in addition to your capital. A great way to beat inflation indeed!


4. To grow money and meet long-term goals


Someone’s sitting in the shade today because someone planted a tree a long time ago.


Warren Buffet

When you invest, you should already have an end-goal in mind. Why are you investing in the first place?

For your future business? For your dream house? For your retirement?

Whatever it is, I’m pretty sure it will still take some time to achieve that. And here you are, learning the stock market, hoping to speed up the process by earning more passively.

When I entered the stock market, my expectations were huge as well. I thought the stock market is like an ATM machine that could give me money anytime I want.

But as days, months, and even years went by, I realized that it takes time. A lot of it. It also requires a significant amount of patience.

If you’re an impatient type, you could divide your capital in two in no time. As they say, the market transfers money from the impatient to the patient ones.

Overall, people invest in the stock market not to get rich quick, but to grow money and discipline in the long run in order to meet their long-term goals. Just as success stories teach us, there is no such thing as overnight success in the stock market.


5. To multiply money through compounding

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. 


Albert Einstein

Suppose you are consistently gaining 10% on your stock picks annually. Your PhP 10,0000 capital will turn to PhP 11,000 next year then.

On the second year, your PHP 11,000 (capital plus previous year’s interest) could turn to PHP 12,100, and so on.

Now, let’s see how much your PHP 10,000 would be after 10 years of compounding, considering you are consistently gaining 10% on your stock picks annually.

YEARCAPITALINTERESTTOTAL
1
P 10,000P 1,000P 11,000
2P 11,000P 1,100P 12,100
3P 12,100P 1,210P 13,310
4P 13,310P 1,331P 14,641
5P 14,641P 1,464.10P 16,105.10
6P 16,105.10P 1,610.51P 17,715.61
7P 17,715.61P 1,771.56P 19,487.17
8P 19,487.17P 1,948.72P 21,435.89
9P 21,435.89P 1,948.72P 23,579.48
10P 25,937.43P 2,357.95P 25,937.43

Note: This is just for presentation purposes. The gains will still depend on market behavior. The investor’s decisions can greatly affect his portfolio performance as well.

On the tenth year, your initial capital of PhP 10,000 can potentially increase to PhP 25, 937.43, giving you 159.37% increase to your capital. That is the beauty of compounding and that may be achievable in stock market investing.


Why do people invest in stocks? Summing it up

If I am to sum-up the reasons why people invest in the stock market, it is to attain financial and time freedom. It will always boil down to that reason. We all want to have those in order to spend time and money for the people and the things which are more important than money.

And now that you came here to know more about investing – specifically stock market investing, I want to congratulate you for taking the first step.

I don’t want to sugarcoat it. There is no guarantee that you will earn in the stock market. There is still a lot more to learn, but if you just press on, you will eventually arrive with your desired results. 

I have to remind you though that this is just an introduction to stock market investing. I still have a lot more to share in my next blogs, which may include the in-depth discussion of the stock market, the requirements to open an account, and the fundamental and technical aspects of stock market trading.

If you find this article helpful, don’t forget to share it to your friends.

Featured photo icon credit: Background vector created by freepik – www.freepik.com

Sheila is a civil engineer by profession but has switched careers to become a copywriter. She loves making sales through stories that are relatable to the average person. She's also a sucker for memes and thinks she’s the funniest person in the world (even though she knows that’s not true). Her favorite drink is Kopiko Brown coffee, but she'll also take tea or beer if it's offered.

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