Why Do You Need To Invest On The Stock Exchange?

Whether we as individuals may like it or not, there are two very major trends which are forcing us to invest on the stock exchange. These are massive trends which will be very difficult for the majority to avoid and as such, will provide vast new amounts of incoming money to the world's stock markets.

Both of these trends relate to the increasing cost of retirement which in turn is linked to longer life expectancy and the effects of a massive ageing population.

Firstly, as we know, most major employers are moving away from the final-salary pension schemes of old. The promises made by employers are proving to be very expensive to keep and as such, current corporate management is trying to lower or remove this burden.

The second major trend is the devaluing of state retirement benefits. Of course, this differs from country to country, but the trend is for pensioners to receive less, not more benefits.

This combination means that responsibility for retirement planning is being placed very firmly on the shoulders of the individual. Many people seem to be still largely unaware of this change, but it is happening all the same.

In addition to this, it is not news that the cost of further education has been rising around the world. In some countries, America being the most extreme, it is not unusual for newly minted graduates to have over $100,000 in debt.

Parents that can afford to help their children often do this by saving money over the medium term towards their educational costs. As with retirement planning, any savings that are being made for perhaps ten years or more, really ought to be invested in something that has a higher risk and return proposition than cash in the bank.

Therefore, by definition, individuals are having to take more responsibility and start understanding investment funds, stock exchange indices, asset allocation and much more.

Suddenly, investors need to decide whether they want to focus on alpha or beta. For the lay person, this means either trusting in the skill of an investment management to outperform the market, or, relying on the market and investing passively in an index. This is a very difficult call to make.

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Should an investor stick with the more traditional unit linked funds investing on the stock exchange and bond markets, or look to more adventurous areas such as hedge funds, property and commodities? Can an investor protect themselves from the potential swings in the market by diversification? Will a mutual fund or unit trust be able to do all that they hope for and need?

Knowledge has value

For those that wish to avoid the complexities and rely on a managed fund, choosing a manager can be hard to do. Even the legendary Bill Miller who had beaten the S&P 500 for an incredible 15 consecutive years has (at the time of writing) just had 2 poor years in a row. Perhaps nothing lasts forever...

In fact, the average US mutual fund investor averages much lower returns than are possible. This is in part due to the unfortunate habit of private investors to jump onto an investment bandwagon and buy into hot funds at the top of the market.Typically, if that hot sector or market loses it's allure, prices drop significantly and many people sell out at the bottom.

This means that a great many private investors do the exact opposite of the most basic investment advice to "buy low and sell high". Some studies suggest that this causes most investors to earn a massive five percent less each year than the S&P 500 index.

Such mistakes are primarily due to a lack of understanding. Private investors often lack economic, business, political, financial or stock exchange knowledge - and this can prove to be very expensive. At the most extreme, this may prove to be the difference between a prosperous or a poor old age.

Being ignorant of financial and economic matters is becoming much more expensive as the years pass.

The movements of the stock market do take some effort to understand, but Wall Street is not as impenetrable as many people think. Much of what goes on on the NYSE and NASDAQ is reported in the Wall Street Journal and many other places every day.

Moving into ever greater prominence for the private investor is a relatively new form of fund, that of the ETF. An exchange traded fund is a flexible investment vehicle that primarily uses computer modelling to replicate an index or asset with very low annual fees.

All these things really prove is that the private investor needs to understand the stock exchange and it's workings more and more - and that an ever greater number of people need to become private investors. This will be a massive change in how individuals are responsible for their own affairs.

Whilst this offers the potential for boom times for the fund management industry, it also offers opportunity for many others including financial and investment advisors, stock market publications and stockbrokers.

Additionally, as large money managers (university endowments, private trusts, etc) look to diversify their holdings and strategies, more are turning to the hedge fund industry with a portion of their assets. By managing money algorithmically and often using arbitrage strategies, many hedge fund managers can offer a different type of market risk.

These factors are bringing about big changes to the stock markets of the world and for investors.

To read more from this section about stock investing for the beginner, please also visit these pages:

Stock Exchange For Beginners

The Beginners Guide To The Stock Exchange - Part 1

The Beginners Guide To The Stock Exchange - Part 2

The Stock Market For Beginners: 7 Starter Tips

How To Start Investing On The Stock Exchange

The Suitability Of Stock Investments

6 Great Ways To Learn About The Stock Market

What Is The Stock Market?

The Search For A 'Ten Bagger'

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