Stocks are longest type of investment you can purchase. By investing in a company’s stock you are actually buying a part of the company’s future and its future profits at the end of the business in all probability. Studies have shown that long-term investment in common stocks have outperformed all other investments including bonds, shares and term deposits. Therefore a majority of investing population invests in common stocks through mutual funds and individual companies.
Most people invest in stocks with the help of tips from experts and friends, advice from analysts, and phone calls and emails from brokers. No matter from whom you take tips and advice, you as an investor should be aware of the benefits and risks in stock market investing. There are several risks which you are most likely to encounter as ways to reduce risks associated with investing.
Being aware of the fact that risk is synonymous with investment in stocks is probably the first big step in stock market investing. Some of the distinct disadvantages which one should be aware of are:
- Neither the company issuing the stock or the government can guarantee you the returns on stocks. In many instances your actual revenue can differ widely from what you had expected. Probably, you had expected the price of the stock of a particular company to increase but much against your expectations the prices could fall sharply.
- Like all owners, as a stockholder you would be the last one to get paid. A company first pays its employees, creditors and suppliers and pay taxes. Only at the end are profits distributed among its stockholders.
- As an investor, you might not be aware of the full details and the current financial situation of the company. Limited information of the company can make investment decision go awry.
- The most important risk is the continual adjustment of the price of a stock to fresh information entering the market. This is known as ‘idiosyncratic risk’.
Common stock has the advantages of a desirable investment option. The very risks involved in stock market investment also make it a very profitable investment.
- Unlike bonds and term deposits it has the potential of huge gains. Some even benefit from ROIs or annual returns-on-investment on a regular basis. The general return that you can expect from long term stock investing is 10-12 %.
- Modern day internet has enabled people investing in stocks to have a more personal and direct access to the financial future and the need of dependence upon brokers have minimized. You can access market data and instant analysis and take control of things immediately.
- Stocks are liquid and therefore they can be bought and sold immediately at a decent price.
- Stocks provide with legal liability and therefore passive stockholders who are not responsible for running the company are protected against any liability arising from the company’s actions.
- Historically stocks have given high returns compared to other investments.