Pros and Cons of Investing in Stocks
Investing capital in the stock market is one of the most common and popular ways of investment. In this kind, one buys shares of a publicly traded corporation, which means buying some percentage of ownership. Now the investors get the right to a few fractions of the firm’s profit and asset. When the price gets high, the shares are sold to get a huge return
When one talks about stock, the first thing that comes to their mind is its risks. Most people do not want to invest in stocks due to their volatility and unpredictability. But at the same time, those who have invested with the right strategy and wise choices have made quite a profit.
The stock market has a lot of pros as well as cons. The mindset of the person and the strategies that they imply decides what will have a major impact. Let’s look at a few of the pros and cons of investing in stocks;
Pros of Stock Investment
Some of the reasons why investing in the stock market are wise and beneficial are;
Easy to buy: Through the stock market, buying and selling the shares of any firm becomes very easy. You can take the help of a broker or your financial manager to buy the shares. You can also purchase them online. One needs to have an account from which they can buy and sell the stocks. Once the account is enabled, it hardly takes a few minutes to purchase the shares. Some brokers also allow commission-free shares.
Gets advantage from economic growth: The stocks’ value totally depends on the current economy. Economic growth leads to corporate growth. It creates lots of job opportunities which causes a rise in income and hence overall growth in sales. All these eventually lead to a rise in the value of the firm, which benefits its shareholders. One can get an idea about how the business works and the phases it has to pass through.
Choose your way of money-making: Most investors try to buy the shares at low prices and sell them when their value increases. The key is to invest in fast-growing companies that have lots of potentials.
There are two types of investors: day traders and buy-and-hold investors. The first group buys and sells the stocks on the same trading days. They invest for the short term. While the second type of investors buy and hold the stock for quite a time and sell them when their value reaches a peak. It is because of both types of investors that the stock market keeps fluctuating. Other investors do not want to take risks and enjoy the regular stream of cash. They buy stocks of firms that pay dividend income. Those companies grow at a moderate rate.
Stay ahead of inflation: One can avoid inflation when invested for a long run in the stock market. In the past few years, it has been found that, on average, the stocks have annualised returns of 10%. It is way better than any inflation rate. One can have their stocks bought and held even if their value drops temporarily. This does not affect the high return in the long run.
Cons of Stock Investment
The disadvantages of investing in the stock market that intimidate most investors are as follows;
Risk: The stock market keeps fluctuating. Its unpredictability does not provide the guarantee of profit to anyone. There is always a risk of losing some percentage of your capital and, in few cases, the whole investment. When any company sees a downfall, you will be left with no option but to withdraw your investment at a very low rate. For those who can not afford to lose money, it is better to go with bonds investment. They provide an income tax break to someone who loses money due to stock loss.
No guaranteed return: The stock market does not allow any guaranteed return as per your goals. For example, if you are investing in any firm to pay your child’s college fees for two years. There is no assurance that the value of your stock will be high or grow after two years. The stock market plays well for long term investment. Its unpredictability makes it very important to have a well-planned strategy. Also, always diversify your investment portfolio to avoid any major harm.
High competition: Professional traders invest more time and knowledge. They make use of various trading tools, financial models, and computer systems. They somehow control the stock market. If you are new in the stock investment, you might face high competition.
A health risk: There is no doubt the stock investment is no less than a roller coaster ride. Its value keeps fluctuating, keeping the investors at an edge. The rate of heart attack, blood pressure issues, depression, anxiety and many such health issues is usually high among stock investors. Those who couldn’t afford to lose money or couldn’t bear the stock market pressure should stay away from it.
Ways to minimize the risk of stock market
With few steps in mind, one can easily tackle all the risks and disadvantages of the stock market;
- Diversify your investment portfolio by dividing your capital into various sectors.
- Know your limits and risk tolerance
- Keep monitoring our investment at regular intervals.
- Have a backup plan ready for any type of market crash or loss.
The stock investment can make you quite a large return. But nothing comes easy. It always has some risks and disadvantages associated with it. One needs to have a proper plan ready before investing in any sector. It helps in minimising any future risk and harm.