The stock market is one of the easiest ways to grow wealth, and it turns ordinary people into millionaires every day. The sheer number of investment options can be intimidating and the risk of loss concerning, but overcoming those obstacles is a lot easier than you think.
One of the simplest ways to turn $10,000 into more than $450,000 is through the stock market.
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How does the stock market grow?
You buy an ownership stake in a company when you invest in a stock. You can keep that for as long as you want. If you need money, you can sell it at the current market value. Your earnings are the difference between what you paid for the stock and what you sell it for.
The market value of your shares should go up if you've invested wisely. Stock prices can go up and down in a single day. The S&P 500, one of the best-known market indexes, has an average return of 10% per year over the long term.
If you invested in an index fund that contained all the same stocks as the S&P 500, you could see your savings grow by an average of 10% per year over several decades. The actual return will be less than the index because index funds charge annual fees to shareholders. The fees are usually a few dollars per year for most people.
How to turn $10,000 into $450,000.
If you invested $10,000 into an S&P 500 index fund today and it had a 10% average annual rate of return over the next 40 years, you'd end up with almost $500,000. That's without ever investing another dime after the initial $10,000.
Those who invest more money often could end up with a larger sum, as could those who reinvested their dividends. Not all stocks pay them, and some do. They can add up over time after being reinvested for a few decades.
I think some of you are thinking, "That's great for someone who has $10,000 to spare, but I don't." The good news is that you don't have to. You can reach the same $450,000 over 40 years by investing less than $81 per month, assuming you still earn a 10% average annual rate of return.
You will contribute more of your own money. For 40 years, it will cost you $39,000 to invest $81 per month. A lot of your money won't be invested for the full 40 years. It's easier for most people to set aside a few dollars a month than it is to accumulate thousands of dollars at once.
This way of investing is simple. The index fund will do the rest of the work for you if you keep putting in money. It will give you an ownership stake in hundreds of companies so your savings are diversified. It helps reduce your risk of loss.
You need patience the most. You will likely experience some ups and downs along the way, but as long as you trust your investment strategy and avoid emotional decisions, you can grow your nest egg over time.
