Advantages and Disadvantages of Investing in Stocks

Advantages and Disadvantages of Investing in Stocks

People who are planning to invest in stocks should definitely have prior knowledge about the various risks involved. Putting large amount of money in stocks is no child's play and it is always good to know the pros and cons of such investments.
If you are a working professional and have the basic knowledge of investments, then I'm pretty sure that the thought of investing in stock market must have definitely occurred. After all stocks are tempting and offer an easy way to earn profits. If you want to have a diversified portfolio, it is essential that you put out some money in the market and enjoy its benefits. There are various ways of investing money; mutual funds, real estate, gold, bonds, etc. However, stocks remain the favorite option for investors who want to make huge profits in a short span of time.

Stocks are nothing but a share in the ownership of the company. When investors purchase stocks they represent a claim on the company's profits and earnings. If the investor starts acquiring more and more stock the claim of the investor over the company also becomes more. When an investor buys a stock, he/she gets a stock certificate (a piece of paper) as a proof of the ownership. Today this piece of paper is hardly in use and most of the data is stored electronically which makes it easier for stock trading.

There are two types of stock available in the market - Common Stock and Preferred Stock. Common stock is a popular form of stock and most of the stock trading happens in this type. Common stocks provide investors with ownership of the company and offer share in the company's profits. Most people prefer buying common stocks because they get to participate in the election of board members and yield higher returns which is never fixed. In case of bankruptcy, common stockholders will be the last ones to be paid until the company has paid the money to creditors, employees and bond holders. Preferred stocks also give certain degree of ownership to the stock-holder but with no voting rights. Investors who buy preferred stocks are entitled to receive a fixed dividend forever; this is not the case with common stocks where the amount of the dividends keeps on changing. The best advantage of dealing in preferred stocks are, in time of bankruptcy preferred stockholders are paid before common stockholders.

Pros and Cons of Stock Investment

It is not that difficult to understand how the stock market works. As a beginner, it is advised that you chip in $500 as the initial investment. Most financial consultants will advise not to put in more as it is better to learn the rules of the game before playing it. $500 is the minimum figure with which you can start stock trading. You can also hire an online trader and seek professional guidance before you choose to buy or sell stocks.

Advantages
  • Buying and selling of stocks can give you lots of gains unlike bonds and some other alternatives. Annual returns on these investments have been more than 100% in many cases. In many instances stocks have always stayed ahead of the inflation rate, this is something which you will not always find in the case of bonds or fixed income investments.
  • As an investor if you purchase stocks, you get a chance to participate in the growth of the company. When you buy stocks of a certain company, you become its partial owner and you are entitled to the profits made by the company.
  • The best part about stocks is that most of them are liquid, this means that they can readily be bought or sold at a fair price.
  • The rate of your stocks is bound to rise and fall on a daily basis but if you have a look at the previous records, stocks have proven to be very beneficial for its investors.
  • There are two simple ways through which stocks makes money for its buyers; Dividends and Capital Gains. Every stock owner is a partial owner of the company and if the company becomes more valuable, the owners get some share of the earnings. This is called capital gains and if the company has noticed more earnings than it expected, it may or may not distribute the excess wealth to its share holders. This excess profit is called dividend payments.
Disadvantages
  • The biggest disadvantage of stocks is that they are a volatile investment. The value of your stock can drastically rise or fall depending on the market condition.
  • As a stock holder you are a partial owner of the company but you are the last one to get profits from the company. The extra earnings is first distributed among employees, suppliers, creditors and used to maintain infrastructure.
  • It is true that share holders are owners of the company but they are not entitled to all the rights and ownership of the company. A shareholder of the company cannot walk in the office of the company and ask for its financial statements and progress reports.
  • Investors who are nearing their retirement age shouldn't have high amounts of stocks in their portfolio. If you are going to retire in a few years, it is advised that you pool in your money in a safe investment.
Like every investment, even stock trading has its own set of advantages and disadvantages. To make sure you can have the complete benefits of the stock market and be aware of its risks it is advised that you have a word with your financial consultant before the buying or selling of any stocks.
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