Any investment, including stock exchange investments, has pros and cons that will impact your decision-making, investment strategy, and overall sense of comfort and security. Therefore, it is essential to be aware of them before making any major financial decisions.
If you’re considering getting into the stock market, here are the main pros and cons to consider when making stock investments.
Pros of Stock Investments
While stocks have a reputation for being risky, for some investors, their potential benefits far outweigh the risks. These benefits, or pros, come in various forms and offer great potential for a thriving investment portfolio that helps you achieve your financial goals.
Stocks Offer Higher Returns on Investment
Stocks can yield higher returns on investments than other investment options like bonds or certificates of deposit (CDs). This increased profitability stems from the fact that stock investors take on more risk than other investment options and are rewarded with potentially higher payouts.
Stocks Deliver Capital Appreciation and Dividends
Stocks have the advantage of appreciating as the organization grows in value. When you invest in a stock and its value increases, you can sell it at a profit. This is where the frequently touted concept of “buy low, sell high” comes from. The rise in value is known as capital appreciation and is one of the most significant advantages of investing through stock exchanges. Some stocks also offer dividends, occasional or periodic payouts of the company’s profits or earnings to the shareholder. Some dividends come in the form of stocks or extra shares in the company, which the shareholder can hold on to or sell for profit.
Stocks Keep Pace With the Economy
Stocks tend to reflect the economy’s growth, meaning your investment will likely grow as the economy does. When the economy is healthy or thriving, it generally means companies are delivering increased growth and profits as well. As a shareholder or investor, this means your shares will increase in value as well, paying off in a higher return than when you purchased them.
Stocks Protect Against Inflation
Over time, inflation weakens the buying power of money, increasing the costs of products and services, from necessities like food to fun and entertainment. Essentially, it impacts the value of the dollar. Inflation is a major factor to consider when investing in long-term financial goals (like retirement) since it will impact the value of your portfolio. Since stocks are more likely to yield higher investment returns, they are also more likely to help your investment keep pace with inflation.
Stocks Can Be Easy and Affordable to Buy
Investing in stocks has a relatively low barrier to entry, making it easy and affordable to get started, regardless of your financial background. Online platforms allow you to begin the investment process at any time from anywhere with just a few dollars. There is also the option of sitting down with a financial advisor or broker, or even using a robo-advisor, to guide you through the investment process and to help you evaluate your risk tolerance, the types of stocks you’d like to invest in, and many other questions and personal preferences that come up when investing your hard-earned money.
Stocks Are a Relatively Liquid Investment
While less readily available than the cash in your checking or savings accounts, stocks are still considered a more liquid asset than an investment like real estate. Typically, selling off stocks is a quick process, allowing you to access your investment if needed—though doing this at random will impact potential gains.
Cons of Stock Investments
Stock exchange investments may come with many advantages, but they also come with a few disadvantages or cons that you should be aware of. Not taking the time to understand the potential pitfalls of stock investments can undermine your investment efforts and end up causing you more financial stress than success. These three items are some of the most prominent concerns regarding stock investments.
Stocks Can Be Risky
The return on investment can be quite high with stocks, but with this comes much higher risk. Stock exchanges can see some share values drop drastically, losing shareholders money. If a company an investor holds stocks in goes bankrupt, stockholders are some of the last to be compensated, resulting in investment losses. The possibility of a company going bankrupt is why it is considered best practice to have a diversified portfolio that consists of different stocks and more stable, though lower earning, investments like bonds or CDs to prevent a company’s bankruptcy or a market downturn from completely devaluing your investment efforts.
Stock Earnings Are Taxed
Just as your work income is taxed, so are your earnings from investments like stocks, unless they’re in a tax-sheltered account. Other factors also come into play with stock taxation, such as holding periods. You’ll need to research what needs to be claimed and how. Alternatively, you can speak with a professional to assist you in planning investments with tax obligations in mind or in helping you claim any gains from your investments, but these come with service fees.
Stock Investments Require Time to Learn and Understand
While it’s easy to start investing in stocks, it can be tricky to understand all the different elements at work, including assessing things like your comfort with risk or how to properly claim investments on your tax return. Then there’s also the fact that buying and selling stocks can be a time-sensitive activity—much like a limited-time offer code provided by an online merchant. You’ll want to become comfortable analyzing the market, businesses, and financial statements to act in your best interest, especially if you’re investing without the assistance of a broker or advisor.
Conclusion
Stock exchange investments hold a lot of potential for investors to grow their money and set themselves up for success in their financial goals. As with any investments, it’s important to research both the pros and cons of stock investments to ensure you’re making financial moves that are in your best interest.
