The Benefits of Stock Options Investing

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Does investing in a stock help grow the company?

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Yes. It does help grow a company. You practically became the owner of the business. You invest in it because you see the potential in the company for it’s growth.

You invest in lets say L$T. There are a lot of others investing and holding the same stock.

Now, the money that has been invested in the company will be used by them to maybe start another project which earns them huge profits, or to use it internally, etc.

For eg: L$T is responsible to construct metros in Mumbai. It requires money for it’s construction. So, their fund managers may use the money from the investors money which is .

Is investing in the stock market worth it?

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There are three kinds of people in this world.

  1. Poor people: They live on their day-to-day wages. They spend what they earn on their basic necessities.
  2. Middle Class People: They buy liabilities and spend all their life repaying the liabilities (loans may be home loan, car loan or personal loan).
  3. Rich People: They buy assets and generate enough cashflows to satisfy all their needs and wants.

The secret of rich people is that they all have multiple sources of income and stock market is one of the most important source. For getting rich you have to make the money work for you, not vice versa.

The Advantages and Disadvantages of Investing in the Stock Market With Personal Finances

When you compare different types of long-term investment strategies, there are few that can match the returns realized by stocks. Even real estate has not kept up with the 10 percent average rate of return seen by large stocks annually since World War II. Along with the potential for greater earnings, however, comes the risk of dynamic market forces that can cause stock prices to fluctuate dramatically. Potential stock market investors should always be aware that there is no guaranteed return on their investment.

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Advantages of using your personal money to invest in the stock market include the potential return on investment and ownership stake in a company. Disadvantages include higher risk and the time involved in investment.

Return on Investment

Historical returns related to stock market investing outperform many other types of investments. According to Vanguard, the historical average return for stocks from 1926 to 2020 is 10.3 percent. In contrast, the average return for bonds during the same period is 5.4 percent. Placing your personal finances in the stock market gives you the opportunity to grow your finances over the long-term. Many well-established companies also pay dividends to investors, which increases your overall return on investment.

Ownership Stake in a Company

Investing in the stock market is one of the easiest ways to become a minority owner within a company. When you buy shares of a company’s stock, you take an ownership stake in the business. Although the ownership percentage is relatively small, you receive the right to vote on certain business decisions and corporate leadership. Unlike some other types of businesses, you can easily exit out of your ownership stake by simply selling the shares to someone else desiring to invest in the stock market.

Subject to Higher Risk

When investing in the stock market, the higher the return the greater the risk of losing money. Stock market prices are linked to the issuing company’s earnings. When a company is experiencing financial difficulties, the price of the stock can decline rapidly. Stock market volatility can lead to a substantial loss of investment. If the majority of the market is experiencing loss and leaving the market because of economic factors, you may find it difficult to sell your shares to someone else.

Time-Consuming Investment

Investing in the stock market is not like playing the lottery. You need to perform research and investment analysis to find potentially profitable stock. For many individuals, investing in the stock market is a time-consuming, complex task. Even after you find a stock to buy, you must monitor the movement of the stock’s price. Although many investors implement a long-term buy and hold strategy, it is important to know when to exit a stock position if it turns out to be a bad investment choice.

The stock-investing chief at $485 billion Schwab offers 4 crucial tips for weathering the coronavirus storm — and outlines how to keep making money

This story is available exclusively on Business Insider Prime. Join BI Prime and start reading now.

  • Omar Aguilar of Charles Schwab Investment Management talked to Business Insider about what investors need to know during this period of heightened volatility, both in terms of strategy and their own biases.
  • Along with his role at the $485 billion investment firm, Aguilar has spent years studying behavioral finance to understand what makes investors tick.
  • He acknowledges that it’s hard to stay rational at times like these but says traders should be guided by their personal risk threshold and not flee to safety or hunt for bargains.
  • Visit Business Insider’s homepage for more stories.

A lot of veteran traders and experts say the market’s recent skid is unlike anything they’ve ever seen. But Omar Aguilar is focusing on how familiar it is.

Aguilar is not only the chief investment officer for equities at Charles Schwab Investment Management — which manages $485 billion in assets — but also an expert in behavioral finance. And when he looks at how investors have been acting lately, the market volatility seen in March suddenly doesn’t feel so new.

“Participants’ behavior seems to be moving in the same way that you would expect in any other crisis, whether it’s a recession driven by financial issues or shocks or natural disasters,” he told Business Insider in an exclusive interview. “A lot of the typical data that drives markets basically stopped, and everything was drawn to the behavioral part of the market.”

He added: “That tends to explain situations like the ones we have now.”

With that in mind, Aguilar has four pieces of advice for anyone trying to make sense of the most volatile market stretch in recent history.

(1) Selling is irrational — but buying can be too

Everyone wants certainty about the trajectory of the COVID-19 outbreak and the global economy, but no data can provide a definitive answer. The expert consensus is that selling at times like these is a mistake that locks in an investor’s losses.

Aguilar agreed this is the “worst possible time” to sell but added that no matter how good the opportunity looks, you still have to be careful about what you buy.

“Anybody that is making long-term investment decisions during this time period, obviously, is trying to anticipate what may happen next or is just doing it out of something that is more of an emotional impulse,” he said. “It is driven by other biases, not necessarily by data-driven decision-making.”

That doesn’t mean all of those decisions will be wrong, but it does mean investors need to be more careful than ever when they spot tempting opportunities.

(2) Focus on risk, not just price

If you’ve been watching your portfolio drop in the past few weeks, you might be tempted to go in and de-risk it immediately. Aguilar warned against doing that, saying that when volatility is high, there’s a good chance that’s going to be counterproductive. He said it was better to wait it out before making changes.

“When you’re in the ocean, and you have several waves hitting you, even if you try to swim, it’s going to probably to just get you tired as opposed to get you anywhere,” he said. “What we’re not necessarily advocating is for people to try to change the course in the middle of this volatility.”

While it might be tempting to buy stocks because they’re cheap or bonds because they’re defensive, Aguilar argued against a price-based approach. Since investors have just experienced the pain of a lot of risk coming home to roost at once, he said they should think about how much risk they want in their portfolios and make smart adjustments.

“Our advice for clients is to evaluate the level of risk, to continue the plan of systematically rebalancing the strategies to their risk level, and to continue to focus on the long run. So if you have a balanced strategy that has certain objectives for the long run, make sure that those are within the tolerances that you set up in advance,” he said.

(3) Don’t rush to safety; think long term

“Most of the time, people try to leave the long-term maturities and credit in lieu of government bonds and for short-term maturities to try to be very risk-averse in these time periods,” Aguilar said.

He added: “What do we advise in this environment is to try to not necessarily just go for the high-quality safety assets that I think everybody’s trying to go to, but look beyond and try to just expand in areas that probably you didn’t have before.”

Aguilar said a better strategy would involve investing in high-grade bonds or other areas of the bond market that will have more upside as markets return to something like normal.

“Most of the time, what you would expect is that as things go back to normal and start recovering, that you actually get the benefits of diversification of the long part of the curve of fixed income,” he said.

(4) Avoid ‘home bias’

US stocks brought in better returns than the rest of the world during the bull market of the 2020s, and the dollar is once again showing strength as the market goes through a tumultuous stretch. That might contribute to a “home bias” that Aguilar warns against.

“Emerging markets . are the ones that are going to drive us out of the recession first,” he said. “The way that we discuss this with clients is to basically look for an entire set of diversification across all asset classes and make sure that their representation is there.”

Do you have a personal experience with the coronavirus you’d like to share? Or a tip on how your town or community is handling the pandemic? Please email [email protected] and tell us your story.

And get the latest coronavirus analysis and research from Business Insider Intelligence on how COVID-19 is impacting businesses.

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