Why you should invest in stocks

There are various options for investing your money. Among them are savings accounts, unit trusts, forex, government bonds, land, real estate, and shares. But why should you choose stocks over the other options?

There are a number of factors to consider in deciding on an investment option. Most important is the return on investment.

The higher the return, the better. Second is the risk of losing capital.

No matter how good the returns may be, you don’t want an investment option where your capital or gains can disappear in the twinkle of an eye.

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Other factors include turnaround time, the ease of cashing out and the capital required to start off. When checked against all these factors, shares score the best in the long run.

Return on Investment

Return-wise, shares have been known to double or even triple within relatively short periods of time. Other than that, when trading shares of rolling stocks, returns of between 10 per cent to 25 per cent are a common occurrence. A look at price charts of various stocks on the Nairobi Securities Exchange will readily provide the evidence.

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Risk of losing capital

While shares are considered by many as a risky venture, this is not entirely true. Risk comes because one does not know what they are doing. But if you are fully in control and have a simple and clear method of trading or investing in shares, you can minimise risk.

To use an analogy, if you are not a pilot, it is very risky to fly an aeroplane, but for a pilot, this is a normal thing.

One of the greatest insurances against risk in stocks is selling. If the market behaves contrary to your expectations, you simply get out at a price you will have predetermined before buying the stock.

However, what most people do is hold even as the price is falling hoping that the gods of the market will reverse the trend in their favour.

Hope is not a strategy in trading or investing in shares. Selling or cutting your losses, as commonly referred to in investment circles, saves you more than money. It also saves you emotional anguish.

Turnaround time

In terms of turnaround time, some investments like real estate can drag on for months or years before a transaction goes through. And don’t forget the paperwork and intermediaries involved in the process.

Saving accounts, bonds and unit trusts usually require a minimum of a calendar year to fully mature. But with shares, gains can sometimes be realised within a few days. This is especially true when the market is exuberant and stocks are rallying upwards, a period when the market is described as being bullish.

Liquidity

To cash out of shares, all you need is to punch in a sell order on your stock broker’s trading platform. If there is a buyer on the other side, the transactions happen immediately. No paperwork is needed and no chain of intermediaries involved. The beauty of it is that the transaction can be done from anywhere as long as you have an Internet connection. After four days, your money will be available to you.

This could even take a shorter time in future when one-day trade settlement becomes operational at the NSE. This is why shares are also considered liquid. To convert them into money only takes a transaction.

Ease of getting in

One other advantage with shares is that you do not require a huge capital to start off. If for instance the price of a stock is Sh5, to buy the minimum lot of 100 requires just about Sh510, commissions included. Thus, irrespective of income level, anyone can invest in stocks.

However, the returns you expect are consumerate with how much you invest. The important thing to realise is that you can start small and grow your account with time.

The tricky part in stocks is knowing what stock(s) to choose, at what price to buy at and at what time to buy and sell. But this is not rocket science if you know your style and the strategies that go with it. Commit to opening an account today and start investing or trading in shares.

As long as you have kept your trading or investing system simple and straight forward, shares will not take much of your time contrary to what many people believe.

With their attendant advantages, they could just be the extra source of income that you needed in order to attain your financial goals.

The writer is the author of The Ultimate Framework for Success in Shares.

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Stock marketsInvestmentsReturn on InvestmentMoneyDr PesaPeter Wambu