When you decide to invest in stocks, it can be a very exciting venture. You can feel like you have a lot of control over your investments and that you have a high possibility of success. While stocks are a great investment tool for many people, they aren’t without their risks. It’s important to understand the potential benefits and drawbacks of investing in stocks before you decide to use them as a way to diversify your portfolio.
In this guide, you’ll learn what the pros and cons of investing in stocks are, along with tips for how to make your stock investments successful.
The Pros Of Investing In Stocks
Stocks have long been one of the most popular methods of investing for individuals. There are numerous advantages to investing in stocks, including:
- Higher returns: There’s a good reason that stocks are so popular among investors. Since 1926, stocks have returned nearly 10%, with some periods of economic strength providing even higher returns. Compared to the average 5.4% return from government bonds, it’s clear that stocks are known for the significant returns that investors can enjoy.
- Limited liability: One of the good things about most stock investments is that your liability is limited to the amount that you choose to invest. If you invest $1,000 in a company, that amount is the most you can possibly lose if your investments don’t succeed.
- Options for investment: There are thousands of companies in which you can invest your money, which gives investors lots of choice when it comes to where their money goes. The best way to use this option is to decide how much risk you want to take. For example, Exxon Mobil is considered a safer company to invest in while a company like Google carries more risk, but also the chance at higher returns.
- Convenience: With the advent of online trading, many investors have found that stocks are one of the more convenient ways to invest their money. Trading can occur anytime, anywhere when it’s done online.
(Also read: Tips For Buying & Trading Stocks Online.)
The Cons Of Investing In Stocks
Stocks can be an exciting way to invest, but they also come with some disadvantages, such as:
- Possibility of significant loss: While stocks have the potential to create huge returns, they have just as much potential for major losses. For example, on October 19, 1987, the Dow experienced a massive 508-point drop, which was equivalent to a 22.6% loss. In just one day, an investor can suffer significant losses due to their stock investments.
- No guarantee: Unlike some other types of investments, there is absolutely no guaranteed return with stocks. Investors take a risk when they decide to purchase shares of a company.
- Low priority during liquidation: If the company you invest in is liquidated, you may not get your money back at all. That’s because stockholders are generally the last on the list of people to get paid when this occurs. Bondholders, debt holders and preferred stockholders get paid what they are owed first. If there is no money left over at the end, you get nothing back.
- Lack of control: Many people feel that investing in stocks give them more power over their investments. Despite what it may seem like, however, stockholders actually have very little control over what happens to their stock investments because they have no say in the business matters of the company in which they are investing. Unless you are a preferred stockholder or have a majority share, there’s little you can do to control the success of the companies you invest in.
(Also read: Basic Things To Know About Stocks.)
How To Decide Whether Stocks Are Right For You
Now that you know the pros and cons, you may be wondering whether it’s worth the risk to start investing in stocks. The answer to that question directly depends on your personal financial situation and you preference for risk-taking.
The key thing to keep in mind when investing in stocks is that they should be just one element of a diversified portfolio. Make sure that a substantial portion of your investments are also made in more reliable areas, such as bonds, to ensure that you have some cushion to fall back on in the case that your stocks do experience significant losses. In short, investing in stocks should be just one piece of your financial investment puzzle. Individuals with a limited amount to invest may want to consider more reliable investment options, while those with a substantial amount to invest can make stocks one of their many avenues for investing.
Now that you’ve looked at whether your finances are suitable for stock investments, it’s time to consider your tolerance for risk. The stock market can fluctuate dramatically. Can you live with the idea that a substantial portion of your investment could be lost overnight? Are you willing to invest in the long term if you don’t get high returns right away? These are important questions to ask yourself before investing in stocks. Those who have trouble with the idea of their investments being at risk may want to consider other options for investing.
If you are considering investing in stocks, or if you are hoping to be more successful with your current stock investments, talk to a financial advisor about how to maximize your returns with stock investments.