Why Entrepreneurs Shouldn't Invest in Stocks Many may disagree, but I believe there's a good case to be made as to why – if you're an entrepreneur – you shouldn't invest in stocks.
By Patrick Scherzinger •
Opinions expressed by Entrepreneur contributors are their own.
As an entrepreneur, you've started a business – or perhaps multiple. Once the cash flow from your company grows and begins to accumulate in your private and business accounts, the question you'll probably ask yourself next is: what should I do now?
It's in the nature of an entrepreneur to want to grow their money and invest smartly, ensuring that their money earns a return and doesn't simply sit in a savings account, earning an interest pitiful compared to the rate of inflation.
With this being said, one of the most popular routes taken by investors to grow their money is through purchasing stocks on the stock market.
However, as an entrepreneur, in a wider sense, this means you're investing in your competition.
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Investing in stocks means devaluing your own business.
Though it makes sense to want to diversify your investments, choosing to reinvest the capital made from your business into other businesses devalues your own company, and indicates that you have more trust in the success of others' companies than your own.
In essence, you're doubting your business and its potential to succeed.
Not only this, but you're redirecting funds that could be used to improve and skyrocket the success of your own business into the businesses of others, so they have the opportunity to gain this benefit from your hard-earned capital instead.
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Stock market returns are estimated at around 7-10%.
The reward investors receive from returns on their stock portfolio rarely exceeds 10% - and that's considered a great return rate.
As an entrepreneur, you should be aiming to wipe the floor with that return rate with the profits earned from your business.
As long as your business continues to succeed, it will provide a greater reward than stocks ever can. What's more, you have a large role in ensuring that success, whereas you have no influence on how other businesses – whose stocks you may be considering purchasing – may be run and, therefore, on their chance of succeeding in the long run.
In fact, a study by Nielson showed that the average Return on Ad Spend (ROAS) across all industries is 2.87:1. This means that for every dollar spent on advertising, a company will make $2.87 in revenue on average. In e-commerce, that average ratio increases to 4:1.
After taking other costs into account, this equates to around a 30-60% return on average – significantly more than the 7-10% you could hope to gain from stock investment.
So, why not consider redirecting the capital formerly earmarked for stock investment into ad spend or another avenue likely to improve the success of your business, such as product development or brand design?
After all, the potential rewards are far greater.
So, if you have trust in your business (which you should – if not, then why are you bothering at all?) reconsider the decision to invest your capital into other companies' stock. Instead, reinvest it back into your business to reap even greater rewards in the long term.
