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Strictly, right now isn’t a great time to try and start investing in the stock market. But that’s only because the London Stock Exchange isn’t open today.
More generally though, I think sooner is almost always better than later when it comes to getting started with investing. And there are some pretty clear reasons why this is the case.
What is the stock market for?
Fundamentally, the stock market is where investors buy shares. Put another way, it allows people to exchange cash for ownership stakes in companies like Amazon, Barclays, and Tesco.
That means everyone considering investing needs to ask themselves whether they’re likely to do better owning cash or part of a business. And the answer can vary for different people.
Someone about to replace a roof or buy a new car might well think cash is a good option. But for those who are looking to build wealth or earn passive income, stocks are a great choice.
In general, businesses use cash and turn it into more valuable things, either by making stuff or doing things. And this allows them to generate a better return than savings accounts offer.
An example
Diageo (LSE:DGE) is a good example to consider. The firm has £8.5bn worth of things like production facilities and equipment and it used these to generate around £20bn in sales last year.
Of course, the company doesn’t get to keep all of that. After buying in raw materials, paying its staff and so on, there was around £6bn left.
Take off a bit more for tax and interest payments on its debt and net profits were just under £3.9bn. But that’s not a bad return on the cash that goes into its production.
Personally – and I suspect this is true of other people – I don’t have a way to make £3.90 per year on every £8.50 I invest. So that makes Diageo attractive from an investment perspective.
What are the risks?
The risk with the stock market is that share prices can fall sharply without warning. That’s why anyone with possible short-term expenses might well see the importance of cash.
Share price fluctuations tend to sort themselves out eventually. Over the long term, what matters for investors is how well the underlying business does.
This is something to think about carefully. In Diageo’s case, the development of anti-obesity medication has caused some consumers to cut back on their overall alcohol consumption.
The company can do things like increasing prices and trying to win market share from beer and wine to try and combat this. But investors need to think carefully about the risk.
No time like the present?
It’s not just Diageo – the stock market has any number of companies, some of which will be more familiar than others. But in my view, the basic equation is clear enough.
The best businesses can earn a better return on capital than savings accounts offer. And the longer investors own shares for, the more dramatic the difference becomes.
This is a clear reason for thinking the best time to invest is as soon as possible. While anything could happen in the short term, I think stocks have a clear advantage over cash in the long run.
