Advantages and Disadvantages of Investing with Stocks

Pros & Cons of Stock Market Investment

Stocks enable the owners to share on control and ownership of a company, as well as the firms’ performance in the stock market in the future.

Whereas in the past the stock market has offered high levels of economic returns, it has associated risks. Helps you decide whether to invest in stock or not by enlightening you about the pros and cons of the exercise.

Major reasons to invest in stocks

1. Building On Economic Development
That is, growth in the economy leads to increase in corporate revenues. In essence, a thriving economy generates employment opportunities, increase consumer’s purchasing power, investors’ revenue, that in turn increases the price per stock. Trading in stocks enable one gain from this expansionist aspect of the economy in the long-run.

2. Beating Inflation
Historically, equities have beaten inflation most of the time. Making a long term investment in the stock markets will also guarantee you a good return on investment that is above the inflation level in most cases. However, it will take quite a long term investment period hence it suffers from volatility.

3. Accessibility and Convenience
Buying stocks is easy. Currently, with several forms of online brokers and investing platforms, you are able to get a stock once you open a trading account. There is no intermediary between the company and the shareholders, and one can invest with as little money as possible since it is possible to buy fractions of a share, hence the Portfolio diversification is made easy.

4. Affordable Entry
Currently, there are a lot of firms that provide the brokerage services through internet, making the transaction cost-free, meaning that you will not be charged when you are buying or selling your stocks. Also, often brokers do not set and specify any minimum deposit, which allows anyone to start investing.

5. Two Ways to Profit
There are two types of returns that come from stock investments these are capital gains (the ability to sell the stock at a higher price than the purchase price) and dividend income (money that is distributed by the company to the shareholders). For those patiently waiting for growth, or those who need a steady income, stock have many varying methods of profit.

6. Liquidity
Stocks are generally classified as an easily traded security and, therefore, easily sellable in the financial market. This makes it convenient if you require your cash since you can always sell your stocks at any one time provided it is during the business hours.

Disadvantages of Corporate Investment

1. Risk of Loss
The first disadvantage of stock investment is the risk that is associated with stocks. Stocks’ value is very volatile, and if a firm has been poor in their returns, all your invested amount can be at risk. This makes their value more uncertain than other classes of investment that include bonds.

2. Stockholders Are Paid Last
The position of the stockholders in the order of priority in liquidating the assets of a company is least and is ranked third after the preferred shareholders and other creditors. What this also means is that sometimes your investment can be wiped out especially in a liquidation process.

3. Time-Consuming Research
Being an ardent stock investor, one needs to devote their time to researching to achieve their goal. Every investor needs to be acquainted with financial statements and company performance with an aim of coming up with good investment decisions in the market. This can be time consuming especially to people who do not understand finances.

4. Tax Implications
Receipts from selling stocks are charged on capital gains tax where profits are attained. Even though some of the losses can be negotiated against gains, the taxes that come with it when managing profit making investments is another factor when managing a stock portfolio.

5. Emotional Volatility
The stock price exhibit high volatility thereby making them sensitive to the market sentiment. People’s feelings can cause a shift of position that may make investors buy their stocks during low prices or even sell during high prices. Battling these emotions takes effort and resilience and a focus on the big picture.

6. Competition with Professionals
The competition with the professional also results form the above suggested options for sexual perverts.

This is mostly due to the fact that the retail investors are more often than not on the same playing field with institutional investors who appear to have far more muscle, clout, and definitely better and more technologically advanced trading tools.

This can be especially very tricky to achieve by our individual jocks hence does not give scope for individual investors to record regular better market results.

Minimising Risk Though Diversification

Stock investing generally has several risks that investors can avoid by diversification. It is a strategy of diversification of investment across the sectors, classes, and geography of investment. This is especially true if one of your stocks or a particular industry does poorly; the rest of your diversified stocks will offset the losses.

1. By Asset Type
The companies that will provide the notes include the stock exchanges, bond markets, and commodity markets. This balance lower the risk while trying to achieve higher level of return in the long-run.

2. By Company Size
Because the stock market has large-cap, mid-cap and small-cap companies, investing in the three categories could provide stability and growth in the economy.
Large-cap stocks usually bear lesser risk than mid-cap or small-reasonable value capital stocks but slightly less possible higher return as compared to small capitalization stocks.

3. By Geography
Diversify your holdings by focusing on domestic organizations together with some international companies and from developed countries like the U.S, Europe, Asia and the emerging market that helps prevent biased by regional cyclicality.

4. Through Funds
With mutual and ETFs or exchange-traded funds, you are able to diversify since they are baskets of stocks. Below, Index funds are cited as relatively simple and cheap means to diversify the investment portfolio.

Conclusion: Costs and Benefits of the Operations

The unique advantages include high returns and hence high returns on investment coupled with beating inflation. However, some of it involves much risk like market fluctuation, company failure, and emotional shift. There are frequently ways that the general risks involved can be managed so that you are in the best position to succeed in the stock market, including diversification and the long-term perspective.

Finally, consistent with the legal basics of stock investing it is critical to work wisely saving goals, risk capacity, and time horizon.Are you planning to invest in the stock market this year? Share your thoughts or strategies in the comments below!