Advantages and Disadvantages of Investing in Stocks

Advantages and Disadvantages of Investing in Stocks

Advantages of Investing in Stocks

When you invest in stocks, you have the potential of making more money than you would with other types of investments, such as fixed rate bonds and certificates of deposit, because stocks participate directly in the growth of the economy and over the long run have historically outperformed any other form of investment. Furthermore, any potential losses are limited to the amount of your initial investment, unlike other forms of investment that are leveraged, such as real estate where you could owe more than your original down payment. In this regard, shareholders have limited liability for the actions of the company's management because shareholders are passive investors that only share in the capital gains and dividends of the company. Stocks also offer a great deal of liquidity because they can be sold at their fair market value and converted to cash at any time on the stock exchange. Lastly, stocks are very tax-efficient because capital gains from the sale of stocks can be offset by capital losses that bring down the amount of income subject to taxation.

Stocks offer profitable returns with limited losses.

Disadvantages of Investing in Stocks

Before you invest in stocks, you should be aware that they involve some risk because the value of the shares of any one company can radically rise or fall depending upon the financial management of that company and the economy in general. Furthermore, the right type of stocks may be hard to find because each stock purchased or sold must be analyzed and evaluated based upon the limited amount of information available through third party sources. This makes diversification of your investment among many different types of stocks difficult due to the financial resources required. Also, the timing of when to get in or out of stocks is hard to predict and should not be attempted by people nearing retirement age.

Stocks can be very volatile and lose money rapidly.

Stock Market Exchanges

When you want to buy or sell shares of stock, you must place an order through your broker dealer for a specific amount of shares at a certain price on the stock exchange. Stock exchanges, such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations (NASDAQ) provide liquidity to the market by offering to buy or sell shares of a specific company to the public at a definite price based upon demand.

Stock exchanges provide a place to buy or sell stocks.