The stock market (which includes share markets) is notable for a number of reasons. It is exceedingly accessible to the average person, it offers high risk and high rewards, and there are countless numbers of people who have made and lost fortunes overnight in them. The stock market crashes of 1929 and 1987 still ring in the ears of investors all across the country, despite the fact that they have long since faded into the history books. This gives the stock market an aura of thrill and fear, which makes it seem scarier than it actually is.
Stocks possess high liquidity and low ability to add value.
Bradley J. sugars places stocks firmly into the high liquidity/low value category. This contrasts with property, which is a medium value/medium liquidity asset, and businesses, which are low liquidity/high value assets. What makes stocks unique from these two is in the fact that they operate at a lightning-fast pace. Stocks have been known to double or halve in value in the space of an instant, and the response from investors is to buy and sell them within the space of minutes, even seconds. Stocks can serve as a quick source of cash when you are in sudden need of funds. While stocks add little value overall, they are still helpful to have on hand.
Trading on the stock market can involve the buying and selling of not only shares, but bonds, derivatives, equities, futures, derivatives, and more. The share market only focuses on the sale of stocks, but the underlying principle behind its function remains largely the same. Understanding the role that “stocks”, which I will take to include all of the aforementioned financial instruments, play in your investments is key to maximizing the value they bring to your portfolio.
One of the most important things to understand about stocks is that you can’t influence their value in any meaningful way. Businesses build value based on the time and money put into them, and even property can be influenced to some degree by the care shown to it by its owner. Stocks do not care what you do or how you feel. Unless you are the owner of the company or you own a substantial number of its shares, you will not be able to have any influence in its value, period. This is what I mean by stocks being a low-value asset – they aren’t worthless, but it does mean you can’t do anything to add value to them. You can treat them as a long-term investment, but they do not carry the relative stability that property and businesses do.
The other side to that equation is that stocks are a very easy and quick source of cash. This means that they can be used to make a quick profit, if that is something you want to do. If you believe that a certain stock is about to head in a certain direction, you can go short or long on them and potentially make a large profit on them. Of course, you can also lose a lot of money as well – this is why wealthy people don’t keep stocks as their primary assets! They are typically not a long-term investment so much as a source of quick liquidity.
With that said, the types of stock you invest in will dictate just how much of a low value/high liquidity asset it is. Treat the stock market as a casino, and that’s all it will ever be. If you purchase stock in companies with solid fundamentals, effective leadership, and healthy profits, stocks can serve as a considerable source of long-term growth to your portfolio. They are not meant to serve as a value-adding asset, but that doesn’t mean that they can’t contribute in a meaningful way to your overall net worth.
Lastly, remember that stocks require the lowest level of maintenance of the three type of assets. You do not have to invest a lot of time and care into getting them to gain in value, only some of your money. If you possess a positive level of cash flow from your other assets, investing some of it into stocks can be a great way to quickly add to your portfolio without going through the long-term hassle of buying and selling property and businesses. It’s unwise to make stocks your primary asset, but they can be of great use when handled properly.