Investing in the stock market can be risky. But it can also bring huge rewards for investors who are patient and careful.
Rather than keeping my money in a savings account, I’m buying shares in businesses. Instead of receiving interest, I’m looking for a return from the company’s profits.
At the moment, the best savings account I can find pays 3% interest per year. The rate is variable, so it could go up or down, but that’s where it is at the moment.
If I invested £100 per month at 3% annual interest, I’d have £58,519 after 30 years. Clearly, I’d have made money, but I believe I could do better in the stock market.
Over the last decade, the FTSE 100 has returned an average of just over 7% per year. That’s significantly more than I could earn in a current account at the moment.
Investing £100 each month at a 7% annual return would result in an investment worth £117,750. But the real difference comes in the income each would generate.
In terms of passive income, the 3% savings account would be generating £1,708 per year after 30 years. The 7% portfolio would be paying me £7,660.
Investing in the stock market offers much better returns than a savings account for a long-term investor. But I think I can do even better by looking at individual stocks.
Stocks to buy
Rising interest rates have been weighing on share prices over the last year or so. But that means there are some great investment opportunities for me at the moment.
Shares in Halma, for example, have fallen by around 19% over the last 12 months. A share of the company’s earnings would cost me £21 today, compared to £26 a year ago.
Furthermore, Halma’s business is growing. Over the last year, the company’s revenue grew 15% and earnings per share increased by 20%.
Outside the FTSE 100, there are other UK stocks that I think are attractive at the moment. Diploma is another stock I’ve been buying for my portfolio.
The Diploma share price is only down 3% compared to where it was a year ago. But its latest trading update indicates that the underlying business is doing well.
The FTSE 250 company grew its revenue by by 30% and its earnings per share increased by 26%. I think that’s impressive.
My investment plan
Savings, index investing, and buying stocks are all ways I could look to generate passive income. And I could start any of them right now.
I believe there are some great opportunities in the stock market at the moment. That’s why I’m looking to invest my money there.
Investing in businesses should – I think – allow me to build my wealth more effectively. And with 30 years to invest, the small differences can really add up.
I’ll look to keep some of my money in savings for emergencies. But for building passive income, the kind of returns the stock market offers are much more attractive for me.