There are many different points of view of the stock market. Having lost quite a bit of money in stocks my father says “stocks are just too risky”, others will quote statistics like “historically stocks have yielded a better average return than other traditional forms of investing”, some advocate daytrading (only keeping each stock for a short period of time like hours or days) as a way to financial affluence.

When you buy a stock you are actually buying a piece of a company and the only way your stock will increase is if the value of the company increases in the eyes of the stock market investors. This might seem obvious but I am astounded by how much of the stock investing litterature that seems to forget this and instead treats stocks as mostly numbers and graphs like it was simply a math puzzle waiting to be solved.

Typically when the subject of stock trading comes up, the question that is asked is whether to invest money in stocks or not – but you can not answer that question without further information about the situation, it would be like asking whether getting a job would provide job security or not, which clearly depends on what kind of job you get and in what company. The same response is valid for investing in the stock market, your success will depend on your objective and the strategy you use to achieve this objective. You can choose to invest with a focus on high risk growth stocks and your investment will be risky, or you can choose to invest in a vast portfolio of stocks with low volatility and your investment will be very low risk, or you can choose a strategy somewhere in between.

What you will need to know as a private investor is that you are fighting a slightly uphill battle. In a given stock market there is a finite amount of money at any point in time, this means that if your investment pool is big enough and your investments amount to a considerable part of the entire stock market you have the possibility of “driving” the market a bit in the direction you want – if a large amount of stocks is traded in a short period of time the price of the stock will either drop (if a large amount of stocks is sold) or increase (if a large amount is bought) as a consequence of the law of supply and demand. The big institutions in the stock market have this opportunity but you as a private investor do not. Addtionally the big institutions will trade stocks so often that they can negotiate better trading fees (you pay a fee every time you buy or sell a stock) than you as a private investor can expect to get. Depending on which country you live in, you might also have to deal with odds that are stacked against you due to taxes on your winnings but no deductions for your losses (Casinos would love such a deal!).

All is not futile though, there is a reason why the statistics show stocks as a traditionally good investment. When you buy stock in a company you are not buying stock in just any company – since a company must be of a substantial size in order to get accepted on the stock exchange, and it is a huge achievement to grow a company to that size, you are in a sense already betting on a winner just by buying stocks on the official stock exchange. Another reason is that the increase in the value of companies in general corresponds closely with the technological progress in society (or more precisely the stock market’s view on the technological progress) as can be seen from this graph of the FTSE index (an index of the top 100 companies listed on the London Stock Exchange) :

I do not think that I am alone in my positive view on the future technological progress of society and even though we had the .com bubble, stock prices have continued to increase after the initial downfall.

Given these pros and cons it is not a clear cut answer whether you should consider investing your savings in stocks or choose another investment vehicle. Generally I would say that if you have an active interest in the stock market and have a good reason to believe you can outwit the market (this competitive advantage is important if you want to reduce the risk) then sure go ahead but remember to not invest money you can not afford to loose. If on the other hand you are interested in the stock market simply because you want to get a better return than bonds, and perhaps you would need to rely on a “market wizard” to guide you, I would definitely not reccomend it.

Instead, what I would reccomend to those without an active interest in the stock market is to invest their money in a mutual fund that specialize in low risk stocks with a slightly higher return than bonds. That way you do not need to become an expert on the stock market and can spend your time doing the things you are already good at – and probably sleep better at night too