Since May 17, 1792, when the New York Stock Exchange opened in New York City, Americans have traded stocks in hopes of increasing their net worth or, more recently, to contribute to their retirement funds. Investing, defined as the purchasing of assets and/or a share of a company which increases in value with time, can provide one with various financial opportunities previously unavailable.
In the U.S., according to an Apr. 2020 poll by Gallup, approximately 55% of Americans invest in the U.S. stock market and own assets. Many investors take the common approach of purchasing assets or a share of a company at a decreased price in hopes of selling at a higher price, making a return on their investment. The funds that come as a result of an investor selling assets and generating gains is defined as appreciation.
However, the profit an investor makes does not go straight into their pockets. Income earned from an investment must go through taxes, administrative costs and, at times, inflation. This process results in the real return, the actual income that the investor makes after paying necessary costs. When an investor makes a gain off an investment, part of the amount calculated into the real returns is a capital gains tax charged by the U.S. government. For investors who have experienced losses in their investing, the government allows for investors to declare their capital losses on their tax returns and deduct the investment from taxable income.
Many different kinds of investors invest based on the level of risk they feel financially able to handle, as well as the capital gains they aim to receive. These investors fit into three categories: conservative, moderate or aggressive. Conservative investors favor lower-risk investments, which can bring a steady return. Moderate investors feel comfortable taking a bit of risk with their investments and even a little short-term loss in hopes of attaining higher long-term returns. Aggressive investors seek out high-risk investments, which have the potential for large capital gains, but may also result in great financial loss.
Various reasons exist as to why investors choose to invest. Some invest in hopes of simply gaining a bit more money for their families, while others invest in projects and companies that they believe have the potential to succeed. Many invest in retirement accounts, known as 401(k)s, which are retirement savings and investments offered through one’s employer in order to set aside funds for the future.
Different kinds of investments have varying risk and reward factors. The investments include, but are not limited to, bonds, mutual funds, stocks, futures and real estate.
When investing in the stock market specifically, different variables cause the value of stocks to fluctuate. These factors include the economic conditions of the country and nations abroad, the age and value of a company, stock trends and current supply and demand, as well as a number of possible other determinants.
Often times, the common recommendations made for investors are to diversify their investment portfolios, think about long-term economic goals and to ignore buzz in the media about a certain company or corporation, as it may eventually wear off.
For those looking to invest, remember to speak with a banker or certified financial advisor for guidance or recommendations.