“Stocks”, “shares”, “investing in stocks”, you must have heard these terms around. Is investing in stocks really a worthwhile and profitable activity? What benefits do investing in stocks offer? This article will be focusing on if investing in stocks is really a valuable enterprise, its importance, and the pros and cons of investing in stocks. But before jumping directly to that, let’s have a brief overview of what are stocks in order to get things underway smoothly.
Stocks or shares are the legal documents or units that entitle its holder to have a portion of an organization’s profits. Companies pay dividends to their shareholders (stocks owners). These dividends are generally paid annually, semiannually and quarterly. The Shareholders are actually the partial owners of the company or organization. They have influence in decision making and policymaking in that organization. In the case of a company winding up, shareholders have the claim over the assets of the company.
So, basically, it’s an investment in any corporation with returns and profits as the main objective. Now, shifting the focus towards the main idea of whether investing in stocks and shares a judicious activity? or what are the benefits of investing in stocks and shares? for that, A comparative analysis between the pros and cons of the stocks will portray a clear picture of whether it is a propitious activity to invest in stocks?
Pros of investing in stocks:
1) A safe investment:
Investing in stocks is usually considered as a safe financing strategy because more often than not, they are guaranteed with dividends or profits. Moreover, in the case of company windup, shareholders have claim over the assets of the company. Either way, the investor is on the safe side.
2) Utilizing economic growth:
Whenever there is economic growth in the country, corporations also flourish. A stronger and growing economy generates new and better job opportunities for people as well as corporations. The more they earn, the more they spend. This creates opportunities for corporations to expand their operation according to the consumer demands which ultimately leads to a rise in sales. This not increases the revenues but also reduces the overall cost of production, which means heightened profits for the corporations. Greater profits ensure greater and timely declaration of dividends to the shareholders. Well, how is that for the advantage of investing in stocks?
3) keeping pace with inflation:
There is no denying that every passing year brings an incline in the inflation rates. This ratio or rate is smaller in developed countries and slightly or significantly higher in developing and under developed countries. Investing in stocks allows you to keep yourself ahead of the inflation rate as generally, the dividend or return rates are much higher than the inflation rate. This allows the shareholders keeping the financial affairs in order and keeping the focus on more productive and fruitful activities.
4) Buyer’s ease:
investing in stocks does not need the buyer to have a particular degree or certificate in order to get things going. Anyone, whether an employee or a businessman or a layman can acquire stocks easily. Corporations have made it very easy for people to purchase shares online. Just sign-up on the company’s website and buy stocks easily within a few minutes. moreover, stock markets are the biggest platforms to buy and sell socks. There are brokers and financial planners who can assist you in acquiring stocks easily. You can also purchase stocks directly from shareholders too if they are willing to sell stocks.
5) Dual income methods:
The basic purpose of investing in stocks is to earn income through dividends. But, there is more to that in case of stocks. Let’s suppose, you purchase stocks of a well-reputed company whose performance improves with the passage of time, then there will be a regular rise in stock prices of that company then if a shareholder wants to sell them, then the difference between the selling price and the purchasing price will be the profit for the shareholder. For example, you purchased stocks for a price of 20$ each and after three years the stock prices reached 50$ each. now, if you opt to sell out these stocks, then you will be earning a profit of 30$ on each share. Not only this, but you would have received dividends for those three years also. How is that for investing in stocks?
5) A collective side income.
Stock invest can also be used as a method for side income. If you are an employee or a businessman or a sole proprietor and you want to earn some extra money while keeping your investment safe, then investing in stocks might be a very useful option for you. Just buy the stocks, keep doing what you do, and get your dividends when they are declared. This can provide you relief against financial anxieties. Moreover, the dividends are mostly given semiannually or annually. This gives you a lump sum amount. Salaries are always monthly packages that only allow you to meet routine expenses. But, dividends are the lump sum amounts and they can help you buy items with “ample prices”. For example, you want to purchase a car, a piece of property, a house or even new stocks then this activity might work perfectly for you.
6) Liquid Assets:
Stocks are also termed as liquid assets. Liquid assets are those assets that can be converted in to cash easily and readily. Investing in stocks gives you that luxury. If there is an urgency and you need money then you can easily sell your stocks to fulfill that need. Moreover, if there is a downfall in stock prices and you speculate a further decrease in the prices due to economic or other reasons and you don’t want to bear further loss then you have the luxury to sell your stock at any time with ease.
7) Tax reduction:
People invest in stocks for the sake of returns or profits. However, if a shareholder sustains a loss in one investment then he/she can settle that loss with profits from other similar investments. Now how is that a benefit? earnings or profits from stocks are taxable and greater the earning greater will be the amount of taxation. However, a loss from one investment can be settled with a profit from another similar invest. This gives relief from tax on the profitable investment. Moreover, if there are losses in stocks and shares, they can be carried forward to next year for tax purposes. For example, if you suffer losses in your investment than you can set off those losses from profits next year. In addition to that, taxation practices in some countries allow losses in shares and stocks to be settled with profits from other sources of income. Thus, reducing the payable tax amount.
Everything that has benefits, also hold some disadvantages. Some of the disadvantages of investing in stocks are discussed below:
Cons of investing in stocks:
1) Taxable income:
Where purchasing stocks bear fruits, it also appends a liability to pay taxes on income generated from investments in stocks. Higher the earning, the higher the rate of tax. Apart from a few countries, losses from stocks can only be settled against the income from similar investments.
2) At the end of the line:
Although stock owners have the claim over the company’s assets in case of the windup, stock owners stand at the end on the line in this case. Preference is given to the bondholders, creditors and preferred stockholders. This increases risk factors as you can lose your entire investment. Moreover, if the stock prices start falling and you are in urgency and need to sell your stocks then you will be suffering losses.
3) Broker’s commission:
If someone is thinking about investing in stocks and does not have adequate knowledge about how the stock market works, how to buy shares of companies that sustain stability, then the investor might get services of a broker or financial advisor. This can increase the cost of the overall transaction as competitive brokers and financial advisors charge a heavy commission.
4) Emotional vulnerability:
Stock prices often fluctuate due to many factors. It may be due to economic factors, political factors, and some notable events occurring in the state like change in government, changing in government policies and so on. This fluctuation can lead to emotional stability and cause stress and anxiety. This can also affect a person’s life as well as professional capacity. For investors, who are also doing jobs and running businesses, this can influence their professional approach.
5) Lesser influence:
Although, stockholders have the influence and the right to vote in the company’s policy or decision making. But, major shareholders can have to final say in these matters. Therefore, small investors may not be able to influence the decision making and policy setting unless they make agreements with each other.
6) Fluctuation in dividend rates:
Companies pay dividends to their shareholders. The rate of return depends on the profit figures for the year. If the profits are higher, then dividends will also be higher and vice versa. In case, if a company sustains losses in a financial year then there is simply no question of dividends. This can be summarized as there is no fixed return on stocks
These were the few pros and cons of investing in stocks. One may get frustrated after get to know about these disadvantages. But, some precautionary measures and practices can reduce the risk to a great extent. Some of them are discussed below.
Risk diversion through portfolio:
Miguel Cervantes said, “do not put all your eggs in one basket”. Putting all your finances in a single investment is not a competent strategy at all. This increases the risk of losses to a significant level. Although, the profits would be higher in case of success. However, the investor would have nothing if the things go south. This can be done through various methods.
- An investor can start by investing in multiple companies. For example, if you invest all your money in one company and the company doesn’t do well, your losses would be significant and unrecoverable. So, investing in more than one company will certainly help.
- Investing in multiple industries can be another rational option. For example, if you invest in the clothing industry, food industry, banking sector or real estate, etc. This will reduce the chances of losses significantly because it is very unlikely that different industries will suffer a crisis at the same time.
- There is also another option for investors, that is, they can invest in multiple countries. For example, if you are not a citizen of the US and you want to invest in a company that is enlisted in the US stock market than you can buy stocks as non-citizens can also buy stocks in the US stock exchange. This can reduce the chances of losses significantly.
- Consulting a financial advisor may affect your pockets but in the long term, it can bear fruits. Investing without a strategy may save you some money that you may be paying to an advisor. But it may cost you in the long term by investing your money in the wrong place.
The bottom line is, Investing in stocks is a very profitable, fruitful and productive activity, so many people have built careers with it. A wise and effective strategy can reduce the few risks that an investor may fear.