Schwab MoneyWise ®

Why invest in stocks? (4 min)

The idea of investing in the stock market can be intimidating, and may lead some to keep their money in cash or bonds. In this video, find out how stocks work to help you build wealth and beat inflation through growth, dividends, and compounding.

Why be an owner in a company? Essentially, it gives you a piece of the action, of what the company’s doing. And for a very small amount of money, you can buy 100 shares of a company, and have all the benefits of that company growing one year, two years, 10 years, 20 years. Not every company does that. But the neat thing is you have a piece of the action. It works hard for you morning, noon, and night while you go about your own profession, and that is a great efficiency you have about investing. Companies are built to grow. They work to sell more products, expand their operations, and increase their earnings quarter-by-quarter and year-by-year. When you buy a stock, you buy a small piece of a company. You become a partial owner, a shareholder. Your stocks can make money for you in two ways: First, when the price of your shares goes up, and second, if the company pays out dividends. Let’s take a closer look. The most basic sign of growth is a company’s ability to earn profits, what the market calls “earnings.” As the earnings of a company grow, so typically does the price of its stock, making your shares more valuable when you sell them. Now, about the other way you can make money—those dividends. When companies are profitable, they can use their earnings to expand the business. They can also pay dividends to their shareholders as a way of sharing some of the earnings. The dividend yield is the dividend divided by the stock price. It tells you how much the company pays in dividends for every $1 of stock. It’s similar to the idea of interest—how much cash you earn for every $1 you invest in that company. And if you reinvest those dividends in more stock, you can earn money on the original investment and potentially see further growth on your dividends. Together, reinvested dividends and appreciation work to create compound growth. Over time, compounding allows your investments to grow faster, and can help you beat inflation. This is one of the most powerful engines of investing. So keep reinvesting those dividends year after year, and you can see how it can really add up. Understand that all investing involves risk, including loss of principal. That’s because stocks are volatile, particularly over shorter time periods. The important thing is to become an owner, stay the course, and invest for long-term growth. Companies are made to grow. The board directors always want their company to grow. Management comes up with a growth plan every single year. If they don’t, guess what? That CEO gets fired. Boards want companies to grow, and so do the shareholders. They’re made to be growth machines. And that is what the whole secret is behind investing. Those companies, successful companies, keep growing, and so does the possibility of their stock price.


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