How the Stock Market Makes the Rich Wealthier

Firstly, we must define rich in this context. Rich will be defined as any individual or group that has savings of 1,000,000 USD (year 2008 USD) or more. However, this can very well apply to those with only hundreds of thousands in savings as well, but would require more strategy and risk for success. This article is not meant to declare that the stock market should not exist, only that certain mathematical realities exist that need to be dealt with. Also, these mathematical realities are very simple, and should have been dealt with long ago. Solutions to the problems that this article implies is dealt with in other articles. It is important to note that there are other types of investments that the rich have an exponential advantage in, but here the focus is the stock market. Age Old Strategy of Diversifying Investment People and groups with excess funds are more easily able to diversify their portfolio. This tried and true method of investing decreases risk. The more one is able to diversify, the more solid the potential is for return when the stock market goes up. Wheras a person or group with limited funds must chose more selectively in specific corporations and industries and therefore exponentially increasing their risk of being stuck with only failing shares or missing out on the full benefits of a bull market. Certainly the more you invest in the stock market the more potential there is for loss, but these situations are rare and can be combated with alternative forms of investment to practically guarantee staying ahead (though outside the stock market it is still using the strategy of diversifying). Exponential Gains Even in a scenario where a person or group with average wealth makes the same successful decisions as a person or group with more wealth, their profit will be lower simply because they cannot invest as much into their choice. The end result of this is profiting on good choices less than their richer counterparts. It is such an unbalanced situation that, with the exception of extreme cases, even someone less wealthy who makes better decisions than someone with much more wealth will almost always finish behind their wealthier rival. Dividend Payments Another option for the wealthy is to invest in shares that offer dividend payments. A person with a few hundred thousand dollars can make a decent amount of consistent income doing this. A person with millions of dollars can easily be granted a living with this strategy. With enough money invested in these types of shares the profits become unimaginably wild. Crashes A great method for the extremely rich to make money is after stock market crashes. The rich often have extra money for investing when others usually do not. After a crash they may buy shares that are highly undervalued that will most likely greatly increase, therefore compounding the wealth of the already wealthy. This is a luxury that other classes of people usually do not have, and if they do, their buying power is much more limited.