Putting your money in the securities market is risky yet profitable. Whereas, holding that cash is ineffectual.
“The market is really volatile, it is better if I keep the cash in my savings account or in my closet.” Does this sound like you? Most people think the same when it comes to investing their hard-earned money in the stock market. Individuals are behind holding money rather than multiplying it.
Looking at the fluctuating nature of the market, many believe having money in their hands is the safest option to preserve money. In reality, wealth isn’t for holding. Alas, you will never make a profit or double your cash by holding that money. Also, holding cash back may result in inflation, which will affect everyone including you. So what benefits you will gain by preserving the cash – this is an important question to think about.
Is it safer and profitable to keep your money in cash or invest it in the lucrative market to make a profit? Read on to find out.
Table of Contents
- Merits of holding cash
- Demerits of holding cash
- Merits of investing in the stock market
- Demerits of investing in the stock market
- Defining perspectives
- Eliminating emotions
First, let’s see what are the benefits of holding cash.
Merits of Holding Cash
Holding the money benefits the holder when the stock market is in its bear phase. When the stock market is in the negative phase, your cash stays safe, thus forbidding unnecessary losses. Your money will be safe because it is in a liquid state and has nothing to do with market fluctuation or volatility.
Additionally, having the cash in your locker or fixed deposits can give you peace of mind. You can use the cash any time unlike the stock market investment, which doesn’t even guarantee returns.
Also in case of an emergency, you will be able to use it. However, there are always two sides to the same coin. With the benefits come demerits as well.
So let’s check out the demerits now.
Demerits of Holding Cash
Regrettably, there is something known as inflation which is far huge and powerful than your little cash. No matter how much amount you have in your bank account or fixed deposits, inflation is going to hit you hard.
Don’t get duped by your thinking that just because you have money in your account and not in the stock market doesn’t mean you are safe. As the inflation rate goes up, taxes and bank charges will also increase. And you will surely lose, a small percent (if not all) of your cash in addition to losing the purchasing power of the money day by day.
“The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time.” – Warren Buffett
Now let’s find what are the benefits of investing in the stock market.
Merits of Investing in the Stock Market
Capital appreciation
Investors benefit when there is capital appreciation, i.e when the share price increases. For eg: You buy a share for Rs.10 and the share price increases to Rs.15. You gain Rs.5 in capital appreciation.
Dividends
If a company is profitable, the investors get benefitted in the form of dividends.
Better returns
With capital appreciation and dividends, there is a chance for better returns, i.e. inflation-beating returns compared to an FD.
Now that you have known the benefits of investing in the stock market, let’s see the demerits too.
Demerits of Investing in the Stock Market
Market Volatility
Share prices increase and decrease multiple times in a day. Hence this poses risk to the investments.
Time-consuming
As it requires research and analysis to find potentially profitable stock, it is a time-consuming and difficult process for many investors.
Lack of knowledge
If you don’t have enough knowledge of stocks, you may have to bear heavy losses.
As you may not be aware of which stock to buy and when to buy or sell.
As the merits and demerits of both the options are clear, it’s time to make a the right choice. But before that, let’s check out the ways to remove the barriers to investing in the stock market.
Ways to remove the barriers to investing successfully in the stock market
To overcome market volatility
You can choose to invest in the SIP (Systematic Investment Plan).
To overcome the lack of knowledge and the time-consuming aspect
You can invest in mutual funds with the help of Financial Advisors. They are experts in the field and so they can guide you. It will no more be a time- consuming task or you won’t have to worry about the lack of knowledge.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” — Robert G. Allen
The Decision Time
Defining Perspectives
Looking at both perspectives, it appears holding cash has limited or fewer benefits that may or may not be the right option. If you have short term goals, cash or fixed deposits or debt funds are the best choice. However, the significance of cash or safer investments to long term investors is gloomy. If you have long term objectives, refer to the stock market performance of the past 10 years and see how it moves and how it has benefitted investors even after a tough period. Additionally, what happens year to year doesn’t affect as much when you are targeting your investment for a long period. Having a good understanding of the market may help you make huge profits. It is good to learn the stock market strategies and standard practices to start.
Your age also impacts deciding between holding cash or investing in the stock market. The closer you get to your retirement, the more important liquidity becomes. As your main source of income stops, accessing cash and liquid assets becomes important.
Eliminating Emotions
One of the most important things every investor and cash holder must cognize: never let your emotions persuade your investment decisions. I actually use the opposite strategy. I buy stocks when the market is low and sell when it is high. In fact, when my equity funds start falling sharply, I don’t withdraw my money, instead, I invest more in the equity funds.
Determining an asset allocation and sticking to it regardless of market condition and staggering your equity investments are the 2 successful strategies endorsed by most financial experts.
Some people invest when the market booms and sell when it is low. By doing so, they are doing the opposite, selling low and buying high.
Whether you should buy stocks or hold cash is a debatable question that has no end. Since, it largely depends on your personal situation, investment time frame, age, personal risk tolerance, choose which option suits you. However, I would recommend maintaining the asset allocation and staggering the equity investment strategy for every type of investor. Consider the merits and demerits of both the investments and make a sound decision.
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