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Stock Investing Benefits

Post on: 25 Май, 2015 No Comment

5 Benefits and 5 Disadvantages of Owning Stocks vs Bonds or Mutual Funds

Question: What Are the Benefits of Stock Investing for the Individual Investor?

Answer: There are five main benefits of stock investing.

Can make money in two ways — First, most investors intend to buy low and then sell high. This is especially attractive to both day traders, who hope to take advantage of short-term trends, and buy-and-hold investors, who expect to see the company’s earnings and stock price grow over time. Second, many investors prefer a regular stream of cash while the stock prices rises moderately. Many companies, which aren’t growing as fast but are still profitable, pay dividends.

Easy to sell — If you need your cash in a hurry, you can sell your stock at any time. However, because prices are so volatile. you might be forced to take a loss.

There are five main disadvantages to owning stocks.

Could lose much or all of your investment — If a company does poorly, investors will sell, sending the stock price plummeting. When you sell, you will lose your initial investment. The only consolation is that your will get an income tax break if you lose money. Unfortunately, you also have to pay taxes if you make money. See Capital Gains Tax .

Paid last if company goes broke — Preferred stockholders and bondholders get paid first.
Requires a lot of time — You’ve got to research each and every company to determine how profitable you think it will be before you buy stock. You’ve got to learn how to read financial statements and annual reports, and follow your company’s developments in the news. You’ve also got to follow the stock market itself, as even the best company’s price will fall in a market correction, market crash or bear market.
Emotional rollercoaster — Stock prices rise and fall every second. Individuals have the tendency to buy high, out of greed, and sell low, out of fear.
Competing against professionals — Institutional investors and traders have more time and knowledge to invest. Find out how to gain an advantage as an Individual Investor .

Stocks vs Mutual Funds

Stocks are generally riskier than mutual funds. Funds pool a lot of stocks (in a stock fund) or bonds (in a bond fund). This reduces risk because, if one company in the fund has a poor manager, a losing strategy, or even just bad luck, its loss is balanced by other companies that perform well. Mutual funds don’t require as much time, because the mutual fund manager researches all the stocks and companies. Of course, it still takes time to research the mutual funds, and this can be difficult. The managers are always changing the companies they own, so you don’t really know what you are getting. You can look at past performance, but if a manager changes the performance can change dramatically. In addition, mutual funds charge annual management fee, while stocks only cost the initial outlay. For more, see Should You Invest in Mutual Funds or Stocks?

Stocks vs Bonds

Stocks are better if you have a longer time horizon. That way, you can buy and hold even if the value temporarily drops. If your main goal is to outpace inflation, then stocks are also better than bonds. However, bonds are best if you can’t afford to lose your initial investment, and you need a steady income stream.

The best investment strategy, whether you hold stocks, bonds or mutual funds, is to be well-diversified. That means have a mix of all three at all times.That’s because research shows this is the best way to gain the highest return at the lowest risk. Financial planners suggest adjusting your asset allocation in response to changes in the business cycle and your financial goals. For more, see How Do Bonds Interact With the Stock Market? Article updated September 4, 2013