Investing in Stocks: Pros & Cons

Historically, investors in the stock market have earned generous profits over time. That said, stock markets also go down, presenting investors with the equal possibility of loss. In this article, we’ll take a closer look at both, the returns and the risks of stock investing.

First, let’s review the benefits of investing in the stock market:

1. You can take advantage of a booming economy: Economic growth creates jobs, which create income. As corporate earnings grow, they boost consumer demand, which drives more revenues into companies' cash registers.

2. You can stay ahead of inflation: Historically, stocks have averaged an annualized return of 10% which is a lot better than the average annualized inflation rate. Over a longer time horizon, you can buy and hold even if the value temporarily drops.

3. You can make money in two ways:
➤Day traders and buy-and-hold investors buy low and then sell high. They rely on their stock-picking skills to outperform the market and invest in fast-growing companies that appreciate.
➤Other investors prefer a steady stream of cash. They purchase stocks of companies that grow at a moderate rate and pay dividends.

4. You can easily buy and sell: Online brokers like Robinhood allow you to buy and sell stocks commission-free.

Once you've set up an account, you can buy shares in minutes through a broker, a financial planner, or online. You can also quickly convert your shares into cash with low transaction costs at any time. Although you run the risk of being forced to take a loss (since prices are volatile), it helps to have that option if you need money for an emergency. 

Now, let’s take a look at the disadvantages of owning stocks:

1. You could lose your whole investment: If a company is doing poorly, investors will begin to sell, which will send the stock price plummeting. You could lose your initial investment when you sell. 

2. Capital gains are taxable: You have to pay a tax on any capital gains resulting from the sale of investments.

3. Stockholders are paid last: If a company goes bankrupt, common stockholders are last on the list of preferences for payment. A well-diversified portfolio will counter this risk.

4. Research requires time and effort: If you’re taking the DIY route to stock investing, you’ll have to research each company to determine its profitability before you buy its stock. You’ll have to learn how to read financial statements and annual reports. Additionally, you’ll have to track the company's developments in the news and monitor the stock market itself.

5. It can feel a lot like riding an emotional roller coaster: Folks buy high out of greed, and sell low out of fear. This means stock prices rise and fall by the second. Investors will feel immense thrill and excitement when the market goes up, but also an equal level of fear and panic when it falls.

6. Individual investors do not have an advantage over their competitors: Institutional investors and professional traders have sophisticated trading tools, financial models, and computer systems at their fingertips. They also have more time and knowledge to invest.