Stock markets are wonderful. Stocks markets are nightmares. Should we love them or hate them?
Embrace them! but be patient and consistent. As every statistics will tell you, stocks (also known as equities) is the best performing investment products available, on a long-term basis. What exactly is Stock?
When you own a stock or a share, it means you own a piece of a company. For public companies, you can buy and sell their stocks freely in the stock market. Depends on demand and supply (which is driven by factors such as the business model, historical earnings, growth prospect, success or failure of new products, lawsuits, political instability and many others), the stock prices move up and down.
Why stock gives the best long-term investment return?
As one of the owners of the company, it is natural to see that you and fellow shareholders capture the most upside when the particular company is successful. On the other hand, if the company is in trouble, you take the most risk. For example, if the company is bankrupt, the remaining money is distributed in the following order: customers, creditors, shareholders, i.e. you are at the bottom of the line.
As you can see, stock is a high-risk, high-return type of investment. The level of risk also depends on the nature of company itself: stock of Citigroup is less volatile than, say, Yahoo.
If I am not a long-term investor, should I get into stocks?
Yes, but you can adjust the risk by adding other lower-risk investment product into your portfolio. You are safe as long as a comfortable level of cash is always available and ready. At the same time, inclusion of some stocks will give you a boost to your overall asset long-term.
Conclusion
It's true that stock markets can be like roller coasters; but stock markets, if you ride it long enough, do not bring you back to where you start -- it brings you to the next level.
The author is a private banker by profession and a manager of her family fund, which has generated a cumulative 54% return in the last 3 years. Please visit her blog, bankernotes.blogspot.com, for daily investment workshops and ideas. She can also be reached at bankernotes@gmail.com