Reasons to start trading in 2023
The last 30 years have produced a revolution in stock trading. What was once the preserve of wealthy individuals or large financial institutions is now accessible to an increasing number of people, thanks to innovation, regulatory change and technological developments.
Whether you want to invest in the JSE Top 40, the NASDAQ or the LSE, there are opportunities to get involved in stock trading wherever you are in the world. But is it right for you? Here are some of the reasons why you should consider stock trading in 2023.
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Bigger potential returns
One of the main reasons why people choose to invest in stocks is that it offers the chance to access higher returns than many other forms of investment. For those with money to invest, stocks can offer a bigger return than treasury bonds, gold or savings deposits. For example, long-term bonds have produced a return of around 5% annually since the mid-1920s, compared to 10% for stocks.
Inflation protection
The returns on the stock market very often outpace inflation. Since the 1910s, the long-term inflation rate has been about 3.1% annually. At the same time, the return from stocks has been in double digits. Although the effectiveness of stock trading and ownership as an inflation hedge varies according to the rise and fall of the inflation rate, in the long term, it can be very effective.
Regular passive income
Even if you don’t intend to hold your stock for years, it can still earn you a passive income in the form of dividends. Most profitable companies will pay dividends, and some dividends are paid quarterly or even monthly. Even for those who trade at a high volume, keeping some stock on a longer-term basis can provide a very useful source of passive income to supplement your salary or pension.
Liquidity
When you are trading in assets, liquidity is important and this is one area in which stocks outperform most other financial products. Liquidity is not a problem for those trading stocks on one of the major exchanges, and transactions involving the buying and selling of stocks usually go through very quickly. This makes stocks the ideal trading vehicle, unlike products such as real estate, which cannot be quickly liquidated and traded.
Diversification
Diversification is a vital part of any investment strategy. Putting all your eggs in one basket can prove disastrous and one of the advantages of stocks is that they enable you to diversify across multiple industries. Your portfolio may contain bonds or real estate but with a few stocks from different sectors added, you can introduce effective and flexible diversification.
Low entry threshold
Traditionally, most forms of investment and financial trading have been considered out of the reach of ordinary individual investors. But while this is still the case for many types of investment, it is no longer relevant to stock trading, thanks to several developments.
Depending on how you access the stock markets, it is now possible to trade with zero commission or to buy fractions of shares through brokers and new types of share-dealing platforms. It is no longer the case that you need to have thousands to spare to invest in stocks and it is even possible to get involved in stock trading with a relatively small amount of money, depending on which platform you use.
It is important to remember, however, that stock trading is not easy and should never be carried out with essential household income or funds that are needed for other purposes.
Understand the risks
While there are many reasons why trading could be a good area to consider in 2023, it is also important to consider the risks involved, particularly if you are new to trading.
Although trading in stocks can be about investing and is not equivalent to gambling, there are significant risks. No one knows for sure which direction the prices of your stocks will move in, and there is also the possibility of the kind of crash that occurred in 2007 wiping out your entire portfolio.
There are sensible precautions that you can take to mitigate the risk, including diversification and doing your homework before investing, but the golden rule of stock trading is to manage your overall risk by ensuring that you never invest in stocks with money that you cannot afford to lose. If you do not have sufficient capital to invest then wait until you do, rather than diverting money from other sources. Stock trading is not a get-rich-quick scheme and you should never enter lightly into trading.
