Traders make money through different investment means, and one of them is stock investing. Investing in a company’s stock involves buying its shares on the stock market. The profits realized are from the return on investment, which every investor is liable for as the company keeps growing.
Many investors have become rich through stock investing, according to history. However, in the advent of the company not growing, the investors bear losses. In this guide, we will discuss whether investing in stock is a wise decision or not.
Reasons to Invest in Stock
Many reasons make a stock a good investment, and they include:
1. Returns Increase with Economic Growth
Corporate earnings increase with the growth in the economy. There is more creation of jobs, incomes, and sales with increased economic growth. There is a surge in consumer demand when there is a fat paycheck; therefore, the cash register of the companies sees more revenues.
2. Inflation Does Not Affect Investment Over a Long Period
According to history, annualized huge returns are realized when investors purchase stocks over a long time. The image above shows the valuation of S&P 500 increasing over a long period of time. Whenever you invest over a long period of time, inflation will not affect your overall ROI. Thus, the temporary drop in a stock value will not affect the total gain
3. Ease of Obtaining Stocks
It is easy for an investor to buy into a company through the financial market. Stock investing will be possible after creating an account. The means of buying stocks are numerous. You can easily buy stocks online or through a brokerage.
4. Does Not Require Large Sum to Start
Some brokers do not charge any commission for buying and selling stocks. Likewise, some brokers do not require any minimum amount before you can start buying and selling stocks. Some brokers also allow investors fractional stock investing when the stock they intend to buy is costly.
5. Two Means of Generating Returns
The main means of making money through stocks that many investors use are buying low and selling high. In this case, they invest in companies that are growing fast so that their values appreciate. The day traders utilized short-term trends to make profits, whereas the long-term investors wait for the stock to appreciate over a long time before getting ROI. Both investors believe that outperforming the market is based on their stock investing abilities. However, other investors prefer earning dividends by buying companies that pay it.
6. Ease of Converting Stocks to Cash
There is nothing stopping investors from selling their stock at their preferred time. At a low transaction cost, investors can quickly turn their assets into liquid, especially when there is an urgent need for money. However, the price of the stock is not stagnant. Therefore, the investor can suffer losses when turning the shares into cash.
Why is Stock Investing Bad?
Although there are many positives of stock investing, it also has its downsides which include:
Forfeiture of portfolio is possible when the company whose stock you bought is doing badly. Such that, the price plummets after selling of the stocks by many investors. Thus, investors who cannot withstand the risk are advised not to dive into stock investing.
Stockholder to Receive Payment Last
When a company faces bankruptcy, those that will get paid first are the bondholders/creditors and preferred stockholders. The common stockholders get paid last. However, if your portfolio is well-diversified, there will be no cause for alarm after a company becomes bankrupt.
Payment of Taxes
Investors are taxed according to the profits they make from stock investing, thus reducing the overall investment return. However, investors do get a tax break when they suffer losses.
Before you buy into a company, there is a need to research extensively, especially when you purchase it yourself. You will need to dedicate time to learning and understanding the reading of financial reports. Also, you will dedicate much time to monitoring the stock market to check for any fluctuations in the market price and watch out for corrections.
Stock investing has numerous advantages likewise downsides as stated in this guide. There are certain risks attached to it, however many investors generate huge ROI after holding the shares for a long time. Stock is a good investment opportunity for those that understand risk management. Diversifying helps traders not to suffer much loss when the value of the company drops. Likewise, when the stock rises, you tend to make a huge ROI.