What are some advantages of investing in the stock market rather than in a bank?

Answer 1

It is a trade-off of risk vs return.

Money in the bank is generally considered risk free. (At least when the amount is small enough to be covered by a government deposit guarantee - most Western nations offer one, don't know about the rest of the world - so you keep your money even if the bank collapses. In USA the limit is currently $250,000 per depositor.)

Money in the bank is considered safe, but you get a relatively low return (fixed interest) on deposits. Investing in the stock market has the potential for much higher returns, but it also carries a risk of losing money.

This is a fairly fundamental economic law: Risk and return are inversely correlated - higher returns carry more risk. This is because the only way to get investors to risk their money - for example by investing in a startup company, with a 90% risk that the company won't survive a year - is to tempt investors with the potential for a higher return than they can get by putting the money in the bank. High returns with no risk is essentially not possible, as it would amount to "money for nothing". The higher returns associated with higher risk is the "risk premium" investors demand for risking their money.

A professional investor specializing on startups will manage the risk by investing in maybe 100 startups: Perhaps 90 of the 100 will be a total loss, 9 will do OK, and one will do very well. The investor essentially bets that he/she will make enough money on the 10 companies that survive to cover the losses on those that didn't, plus some extra profit.

Investors needs to decide for themselves how much risk they are willing to take for how much potential return, and how they want to manage the risk.

Standard investment advice is to put some part of your savings in high-risk, high-return assets like stocks and some part in low-risk, low-return assets like government bonds. The part at risk should not be bigger than you can afford to lose.

Other standard risk management advice includes diversification, spreading investments over several different areas so that potential losses in one can be offset with gains in another.

In short, investing in the Stock Market promises higher return in the long run for

* a higher risk

* more time and effort in selecting investment candidates

* more time and effort in picking risk management strategies

Answer 2

The only advantage is the fact that, investments in stock market usually grow at a much higher pace than the deposits in banks.

The average growth rate of stock market instruments is around 15% which is nearly twice as much as in banks.

Note: Stock market instruments carry a risk and hence there is no guarantee of this return % on investments.