Whether a novice or a professional stock trader, you only have one reason to trade and grow your money. Trading stocks is one of the surest ways of diversifying your investment portfolio.
Owning stocks in different companies helps to increase your savings, maximizes the ROI, and provides you with protection against inflation and taxes. Even as lucrative as stock trading is, it is critical to understand that it has several risks. In this article, we look at the benefits and limitations of stock trading.
Advantages of Stock Trading
1. Purchasing stocks is easy
If you are new to stock trading, you do not have to worry about how you will go about purchasing them because it is an easy process. You can purchase your stock through an online trading platform, a broker, or your money manager,
You need to create an account, and you will have your stocks within a few minutes. Even better is that some online brokers do not charge any commissions or fees, allowing you to buy and sell your stocks with ease.
2. Building investment portfolio
Stock prices tend to rise and fall over time. However, stock returns outperform cash and fixed-income investments such as bonds in terms of total return. When building their equity portfolio, investors may consider taking long-term trading. The reason is that stock market fluctuations tend to smooth out over longer periods.
3. Allows you to make money in two ways
Most stock investors strive to buy low and sell high to maximize their returns. They make investments in rapidly expanding businesses they expect will grow in worth, appealing to both day traders and investors who prefer to buy and hold stocks. A few investors look forward to profiting from short-term trends, whereas a larger number hope to see the revenues and stock price increase over time.
It is their firm belief that their stock-picking abilities will enable them to beat the market. Other investors prefer getting a consistent supply of revenue. They invest in dividend-paying fast-growing companies by purchasing their stock.
4. Protection against inflation and taxes
Taxes and inflation can have a negative impact on your net worth. Over the long term, equity investments can provide investors with better tax treatment and prevent the adverse effects of inflation. In short, favorable tax treatment for equities can allow you to keep more of your money in your pocket, this taking care of your financial well-being.
5. Maximizes Returns on investment
When you buy stocks from some companies, they provide you with special distributions or dividends. Investing in these payments provides you with regular income and increases your returns on investments.
6. Easily turn your stock into cash
Selling your stock is simple because the stock market allows you to sell your stock at any time. If you are hard up for money, you can convert your stocks into cash in a short period and with minimal transaction fees. However, because of the volatility of the market, you run the risk of taking a loss.
Disadvantages of Investing in Stocks
1. Risk of losing your entire investment
When a company performs poorly, investors will sell their shares, causing the stock price to plummet. When you sell, you will receive nothing back from your initial investment. If you cannot bear the thought of losing your initial investment, you should consider trading in another market such as bonds. If you incur a loss on your stock investment, you are entitled to a tax break. If you make money, you will also have to pay capital gains taxes on it.
2. Competitive pressure from professional stock traders
Investment firms and successful traders have more time and expertise to invest than traders with little or no knowledge about stock trading and private investors do. Aside from that, they have access to superior trading tools, best trading platforms, investment strategies, and information technology systems.
3. Stockholders are the last to get their pay
If a company goes bankrupt, preferred stockholders, bondholders, and creditors get their pay first before the stockholders. However, this occurs only a company goes bankrupt. Having a well-diversified investment portfolio will protect you if a company goes bankrupt.
4. Emotional trading
Stock prices rise and fall on a second-by-second basis, creating an emotional roller coaster. Individuals tend to buy high in times of greed and sell low in times of fear. The best course of action is to refrain from continuously monitoring stock price movements and regularly check the market.
Suppose you are investing in the stock market on your own. In that case, you must conduct extensive research on each business to evaluate how lucrative you believe it will be before purchasing any shares of stock in that company. You will need to learn how to read financial statements and annual reports and keep up with the latest news about the company.
You must also keep an eye on the stock market as a whole because even the most successful company’s stock price will fall during a bear market, a market crash, or a market correction.