Stock Investing Pros and Cons You Must Learn
Investing in the stock market is arguably the most “mainstream” way of investing one’s hard-earned money in order to gain more wealth. Before you jump in and dive deep into stock investing, read the following pros and cons of investing in stocks.
Pros of Investing in Stocks
Ownership of a growing economy
When you own a stock, you also own partial rights on the profits of that company which issued the stock. When the economy grows, corporate earnings also see growth.
The reason behind that is economic growth creates jobs, which means more income, which means more sales. Bigger paycheck means greater boost in consumer demand, which funnels more revenues into the company’s cash registers. This becomes clearer when you are familiar with the business cycle.
You can stay ahead of inflation
History would show you that stocks have an annualized average return of 10 percent. This is better than the average annualized inflation rate of 3.2 percent.
Meanwhile, this tells you that you have to have a longer time horizon. Doing it that way means you can buy and hold more even if the value temporarily declines.
Stocks are easy to buy
The stock market, overall, helps investors and traders easily buy shares of companies’ stocks. You can buy them with the help of a broker, through a financial planner, or via the internet.
After you’ve set up an account, you can buy stocks in literally minutes. There are many online brokers even let you buy and sell stocks without any fees or commissions.
Making Money in Two Ways
Most investors try to buy low and sell high so they invest in companies that grow fast and appreciate in value. This is appealing to both day traders and buy-and-hold investors.
Day traders hope to gain some benefits from the short-term trends, while buy-and-hold investors try to gain from the company’s earnings growth and stock price appreciation over time. The two groups both believe that they can pick the right stocks to enable them to outperform the market.
Other investors, on the other hand, choose to have a steady stream of cash so they buy stocks from companies that pay out dividends to shareholders. Such dividend-paying companies experience growth at a moderate rate.
Cons of Investing in Stocks
Losing the Whole Investment
If a company performs poorly, the investors will sell and thus send the stock plummeting. When you sell the stock, you lose your initial investment. If that doesn’t sound so hot to you, you can consider investing in bonds.
Stockholders are Last in the Priority List in the event of Liquidation
Preferred stockholders and creditors along with bondholders get paid first in case the company goes belly up and bankrupt. Meanwhile, this only stresses the importance of keeping a well-diversified portfolio to protect you in case such events happen.
You will have to perform extensive research on the companies you want to invest in to find out how profitable you can be when you finally buy that stock. You have to learn how to read financial statements and annual reports. You also have to track the company’s developments in the news.
Competing against Professionals
Professional traders and institutional investors have more time and knowledge when it comes to trading. They also have access to trading tools, computer systems, and financial models.