The Pros and Cons of Investing in Stocks
The Pros and Cons of Investing in Stocks
Stocks have the potential for greater earnings and very few long term investment strategies can match the returns realized by stocks. However there is the risk of dynamic market forces that can cause stock prices to fluctuate dramatically. Stock market investors should always be aware that the return on their investment is not guaranteed. Some pros and cons of investing in the Indian stock market:
Return on Investment
Historical returns related to stock market investing outperform many other types of investments. Putting one’s finances in the stock market gives the opportunity to grow the finances over the long-term. Many companies also pay dividends to investors, which increase the overall return on investment.
Ownership Stake in a Company
When an investor buys shares of a company’s stock, one gets an ownership stake in the business. Even if the ownership percentage is relatively small, the investor has the right to vote on certain business decisions. And it is easy to exit out of the ownership stake by simply selling the shares to someone else wishing to invest in the stock market.
Cash in on opportunities
In a country like India, a plus point about the stock market is that there is always an opportunity for growth. The market has been volatile lately and there are two ways of dealing with it – playing safe or cashing in on the opportunities .One can get some great returns if he/she is aware of the market and acts accordingly.
Stocks always beat cash and Inflation
As per the past trends, the stock market has always performed much better than cash in the long run. It also beats inflation, given the power of compounding over the long run.
Deciding the risk tolerance
If an investor wants to keep the risk level low , he/she can invest in companies with an established track record (bluechips)of giving low but steady returns and vice versa.
For investors who put money into different types of investment products, a stock market investment provides diversification. Stock market investments change value independently of other types of investments, such as bonds and real estate. By holding stock one can overcome losses from other investment products as it has the potential for large, rapid gains.
When investing in the stock market, the higher the return, the greater the risk of losing money. When a company faces financial difficulties, the price of the stock can decline rapidly. Stock market volatility can lead to quite an amount of loss of investment.
Time Consuming Investment
While dealing with stocks, one needs to perform research and investment analysis to find potentially profitable stock and constantly monitor the movement of the stock’s price after buying it. All this is time consuming.
Is it worth investing in penny stocks?
Despite the risks, small investors are putting big money in low-priced penny stocks (Penny stocks are common shares of small public companies that trade at low prices per share). When investing in this risky segment of the market, a few rules should be kept in mind.
Do not invest large amounts
Penny stocks should not account for more than 10% of the total equity portfolio. One should invest only what he/she can afford to lose.
Invest only in 2-3 stocks
The principle of diversification does not work here. Spreading the money across a basket of low-priced stocks will not let one earn meaningful returns from them. It is easier to monitor 2-3 stocks than a portfolio of 10-15 low priced stocks.
Don’t invest and forget
Investing in penny stocks should be seen as a short-term strategy. If the stock witnesses a sharp rise, it is time to exit or at least book partial profits. Penny stocks should not be held for forever.
4. Buy stocks with high volumes
Buying stocks that have reasonably high trading volumes gives scope for ample liquidity.
Never try to average the purchases
One should improve the average by selling some shares when the price starts moving up, rather than buying more when it goes down.
Why would a person choose a Mutual fund over an individual stock?
An investor can purchase shares of mutual funds, which hold a number of individual stocks instead of investing in the stock market by buying shares of individual stocks. Advantages of choosing mutual fund over stock
Diversification A mutual fund pools the funds of many investors. Thus a diverse portfolio can be achieved with only a small investment.
Lower Trading Costs
When trading small blocks of stock, the transaction costs often end up being a higher percentage of the purchases and sales. With a mutual fund, the cost of selling off investments and purchasing new ones is lower because it’s spread among all the investors.
When one invests in a mutual fund, the money gets managed by a professional fund managerwhose job is to watch the market and pick winning investments. With the possible exception of diversification, professional management is probably the single best reason to go with mutual funds.
Depending on the level of investment experience and expertise, one might not do so well in picking individual stocks. But when investing in a mutual fund, one gets the expertise of the management team, at a cost though. But the cost is spread among all the fund investors and one can pickfunds with lower expense ratios.
Debalina Roy Chowdhury
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