The Pros and Cons of Investing in Stocks

Everyone has heard of stocks, but what are they? They are, essentially, ownership units in a corporation and represent a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred. Common stock entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock carries a higher claim on assets and earnings. All public stocks are represented by a ticker symbol, which is an abbreviation that uniquely identifies each stock.

Stocks are also called “shares” or “equity.” The most commonly traded stocks in America are shares such as Bank of America (BAC), Microsoft (MSFT), or Cisco Systems (CSCO). Before you invest in stocks, here are some of the asset class’ pros and cons.

Pros of Investing in Stocks

1. Stocks can be very profitable. Studies show that stock investing trumps assets such as bonds over time, meaning that over long holding periods, you should end up with more money.
2. Investing in stocks is easy. While it may require research, most investing is done on paper or electronically. There is nothing tangible that you have to deal with afterwards, such as a leaky washing machine in your recent real estate investment.
3. Stocks are well-researched. There are decades worth of peer reviewed and published studies examining the performance of U.S. equity markets. Commercial brokerage services such as Schwab or Valueline also provide in-depth and sophisticated analyses of companies. This means you will never be in a situation where you do not have all the information you need about a specific share.
4. Stocks are generally transparent. Many people seem to feel the Wall Street game is rigged. However, equity markets in America are well-regulated and transparent. In contrast to investments with a more immature regulatory structure – such as peer to peer lending – stocks tend to be well-regulated, and therefore safer.
5. Stocks are liquid. Provided you hold common shares of a well-traded company, it can be easy to sell your shares. All it requires is mailing in your certificate or putting in a sell order via your computer of mobile device. Most of the time, your cash is ready to go in a matter of seconds.
6. You can borrow against your stock portfolio. While you can also borrow against other assets such as real estate and bonds, borrowing money against stocks is a well-established practice. It also tends to have less paperwork than refinancing your home. If you need cash for something, having the option to borrow against stocks makes your financial picture that much more flexible.
7. Stocks pay dividends. This means you can have your cake and eat it too, or rather, you do not have to sell your stocks to realize gains. If you are holding stock that pays a dividend, just sit back and receive payments.

Other readers also enjoyed: 

• What Stocks Are Members of Congress Investing In? 
• Begin Securing a Financial Future With the 52 Week Money Challenge 
• A Beginner’s Guide to Investing
• How to Earn Money at Home Without Investment 

Cons of Investing in Stocks

1. Stocks can be risky. This asset class risks losing up to 100% of your money. Companies, even big ones such as American International Group or Washington Mutual, go out of business all the time. Even major icons such as General Motors have gone out of business or required Federal assistance to stay afloat. Investing in stocks risks investing in a company that will go out of business.
2. Stocks carry trading fees. Although fees are on a long-term downward trend, some companies such as Schwab or Chase charge a fee to buy or sell stocks. In general, try to avoid stocks with fees. Consider companies such as Loyal3 or Robinhood, which offer fee-free trading platforms.
3. You need to buy several stocks to get the benefits of diversification. Diversification means to create a portfolio of multiple stock investments in order to reduce risk. This practice requires investment into multiple stocks, or at least into a mutual fund.
4. Stocks do not protect against inflation. Investopedia notes that unexpected inflation has a direct and distinct effect on stock returns, including a “greater volatility of stock movements.”
5. Timing can be tricky. It is difficult to get the timing correct when to buy and sell stocks. Market timing is difficult simply because the future is unpredictable.
6. You have little control. Unlike a small business or directly-managed real estate, the amount of personal control you have over a publicly traded company is low. Stock carry voting rights, but small stockholders with only a few hundred shares tend to have little impact on corporate decisions.

The best practice in stock investing is not to rely on luck. Be realistic about investing in stocks, as well as distributing and diversifying your investments. Ask for help when you need it. Weigh the pros and cons, and ask yourself: would you consider investing in stocks?

Photo: The Economic Collapse

Alexa Mason

Alexa Mason is a freelance writer and internet entrepreneur. She is also a parent to two beautiful little girls. She chronicles her journey as a single mom working on building financial security.