Jan 12 Pros And Cons Of Investing In The Stock Market
There are five main investment options or as financial professionals like to call them, asset classes. We have bonds, which are also called fixed-income securities, real estate, commodities like gold, money market instruments, also called cash equivalents, and our topic for today — stocks or equities. Stocks are shares of a company that are obtained through private or public purchase. Depending on the number acquired, these shares transfer a fraction of the company’s ownership to the investor. After acquiring the shares, you become a shareholder in the company and you start receiving a fraction of the company’s profits as dividends and the value of your shares increases as the company becomes more profitable. As any professional Clifton NJ accounting firm will tell you, stocks are considered as the most rewarding asset class in the investment world. You can either purchase equity in a private firm or in a publicly traded corporation; the latter is me popular. Private companies float their shares for public investment for the first time in an Initial Public Offering (IPO). Later on, any investor can buy or sell shares of any public company on public stock exchanges. There are several pros and cons of investing in stocks and we are going to look at some of the major ones below.
Although they are ranked among the most volatile asset classes, stocks offer some of the highest ROIs. Stocks offer profits on investment in two ways. You receive a share of the company’s profit annually as dividends. You also enjoy capital growth on your investment over time as the company grows. All investors in the stock market aim to outperform the market by buying when the prices are very low and selling when they hit the highest mark. Short-term investors or day traders cash in on day-to-day market fluctuations, while buy-and-hold investors give their investments time to grow while savoring dividends in the short-term. The other advantage of investing in stocks is that shares are very easy to liquidate. Stocks are very easy to buy and sell. You can buy shares from any major corporation via the internet from the comfort of your home in just a few minutes. Likewise, you can easily sell your equity in any company at any time without incurring significant losses. For long-term investors, stocks are the best investment instruments to hedge against inflation. They offer the highest ROI against all inflation odds despite temporary fluctuations. And last but not least, the value of all stocks is driven by the economy. This means that your stock portfolio will do very well in a growing economy and vice versa.
One of the main drawbacks of investing in the stock market is the high risk associated with the industry. The stock market is highly volatile with never-ending fluctuations on share prices. You can easily lose your entire investment if the company you have invested in performs poorly and people panic sell their shares causing drastic price drops. In case a company goes bankrupt, shareholders are usually the last to be paid after preferred stockholders and bond investors. The good news is that capital losses on stocks are exempted from income tax. However, stock market investors are taxed on capital gains. Another con of investing in stocks is that they require intensive management. Investors are required to always keep an eye on the performance of companies in their stock portfolio to predict future share price changes. Not to forget that most of the time you will be competing with professional wealth managers who are well versed in the intricacies of the stock market.