Why Is Investing In The Stock Market Important?

Many people wonder why is investing in the stock market important? The main reason is inflation. You need to earn more on your investments than the rate of inflation. Let's say you earn two percent and inflation is three percent. Your real rate of return is a minus one percent. If you put your money in the bank, you can pretty much bet that while your money won't be as at risk, you will lose purchasing power -- your money won't buy as much as it used to.

If you learn how to invest in the stock market, you take more risk, but you increase the chances that over the long haul, you can earn more than the rate of inflation with your stock market investing program. The overall stock market has had an average return of around 12 percent long term. This means that your money that's invested will actually gain in purchasing power if you average that too. The hard part is averaging that. If you invest wisely and have a long term investment horizon, you have a better opportunity to outpace inflation.

Deciding to invest in the stock market is your first step to higher returns. But this decision alone will not earn you more money than other investments. The chance to earn higher returns comes with more risk though and in the stock market you could lose all of your money. Many people lost half their portfolios a year or so ago. A lot recovered most of it during this year's stock market rise. If you would have needed your money at the end of last year though, you would have taken a substantial loss. You have to remember that money you need now, shouldn't be fully invested.

It's because of this risk of loss, many people are not willing to invest and therefore, lose the battle with inflation. And, in my mind, the inflation number is too low. Although my milk may not cost a lot more from year to year, the stuff I have to buy like health insurance has doubled in the last five years. So, the inflation number that's reported is really not the "real world" number.

This makes it even more important to learn how to start investing in the stock market.