Buying and holding stocks can be intimidating for new investors because stock prices fluctuate unexpectedly. You can make money in the stock market if the value of shares you hold goes up, but you can lose money if stock prices go down. Investors buy stocks despite the possibility of losing money, because stocks offer several advantages that can outweigh the risk of potential losses.
The primary benefit of holding stocks is that they have the potential to produce large returns. According to CNN, stocks have produced returns close to 10 percent a year on average for long-term investors since the first half of the 20th century. By contrast, U.S. Treasuries, a common alternative to stocks, have historically produced returns of around 5 percent. Investing for many years gives shareholders time to ride out periods of poor stock performance and take advantage of long-term stock trends.
When you buy a stock and sell it at price that is higher than the amount you paid, you make a profit called a capital gain. All stocks offer the potential to make capital gains, but some corporations also offer periodic cash payments called dividends. Holding a dividend-paying stock provides an income stream that can increase over time if the company that issued the stock performs well. If you don't want to receive cash payments, you usually have the option to automatically use dividends to buy additional shares of stock.
Taxes on returns from stock investments can be lower than taxes on interest and other regular income if you hold investments for the long-term. Capital gains are subject to federal taxation, but the capital gains tax rate is capped at 15 percent if you hold an investment longer than a year. If you sell a stock within a year, you pay the short-term capital gains tax rate, which equals your normal income tax rate.
Inflation is the rate at which prices in the economy are increasing. If the inflation rate exceeds the returns you earn on your savings or investments, your purchasing power -- the amount of stuff you can actually buy -- decreases. For example, if the economy is experiencing 3 percent inflation and you save your money at a bank that pays 2 percent interest, you are actually losing 1 percent of your purchasing power each year. Stocks can allow money to grow faster than inflation, thereby preserving and increasing purchasing power.