Advantages & Disadvantages of Common Stocks

Growth Potential

Owning stock entails risk; however, the financial rewards can be greater than if you limited yourself to certificates of deposits or bonds. Historically, common stocks have been more profitable than other types of investments. In fact, there are many cases where common stock increased by more than 100 percent when owned a relatively short period of time. Furthermore, unlike leveraged transactions like foreign exchange, your losses are limited to your initial investment. Finally, most common stock you can buy is relatively liquid meaning that it can be sold quickly at a fair price.

Dividends and Capital Gain

The owners of many common stocks receive dividends when companies make a profit. Because common stock is partial ownership of the company, if the company becomes more valuable, the price of its shares will climb.

Limited Liability

All shareholders with the exception of those running the company are shielded from potential liability. For instance, if the company must pay millions of dollars for damages sustained by misfeasance, the value of its shares may fall, but that is the extent of your responsibility as a shareholder.

Stockholders Get Paid Last

A company in which you own common stock must pay its creditors, employees, taxes and other expenses first. Then, from the money it has left, it can pay owners like you.

Volatile Values

You would think that a company that is fiscally strong and has a good future will enjoy the rise in the price of its common stock. For reasons having nothing to do with the company, the price of its common shares can be volatile. For instance, perhaps false rumors of the company are circulated that prompts many shareholder to sell. The price of the stock will fall. Or it will be the victim of being in an industry that is not held high by investors.

Warning

There is a risk in owning common stock, but it can be minimized by an investor that does his homework. Not ever stock will perform as their figures indicate; but over time, an investor in common stock will make money.