With everything happening with the market right now, it can be scary to even think about investing in the stock market. However, times like these are when millionaires can be made. These major drops and swings in prices can greatly benefit your portfolio… if you are wise with your choices. This article outlines the pros and cons of investing in stocks with the goal of trying to maximize your returns.
What Are Stocks?
Well, you have probably heard of the stock market and stocks dozens of times but do you know what they actually are? Stocks, also known as equities are individual shares of ownership in a company. These companies have to be publicly traded and are then traded on what is known as the stock market.
When you own stock in a certain company, you become a shareholder. Your investment will increase and decrease with the companies success.
With any sort of investing, whether in the stock market, real estate, gold coins, there is a certain level of risk. I want to walk you through all of the pros and cons of stock investing and then touch on how some of the cons can be mitigated to lessen your risk.
Pros Of Investing In Stocks:
- Unlimited Earning Potential: This means that there is nothing that says the $10 stock you buy cannot jump all the way up to $100 at some point, giving you incredible returns. Whether you are investing for the short-term or the long-term, your income potential from the stocks you buy has no ceiling
- Relatively Liquid Investment: Comparing stocks to other investments, like real estate or gold coins, stocks are quite liquid. This means that you can easily sell your stocks to access the underlying dollar value if you need to. While many other investments could have you wait days, months, years – stocks can be bought and sold in a matter of seconds.
- Flexible Investments: Stocks come in many shapes and colors. There are stocks that pay dividends, stocks that help save the environment, stocks that support the fight against the global pandemic going on right this very second. There are literally so many different flavors of stocks, there is bound to be something you fancy. Whether you are just trying to make the most money you can or put your money towards a good cause, these investments offer you a wide array of options.
- Beat Inflation: Stocks annually return on average around 10% according to Nerd Wallet. Inflation on average is about 3.22% according to Inflation Data. This means that if you are getting 10% return and 3.22% is taken away due to inflation, you are still earning 6.78% on your money. That is a great return. If your dollars just sit in your bank account, earning 0.01% or even less interest, you will have less money in the future then you currently have.
- Utilize A Growing Economy: Look, the economy isn’t doing great right now and unfortunately it will probably be like this for a bit of time. However, this means it is the perfect time to position yourself for successful stock market investing. If you buy stocks now, they will be heavily discounted. Therefore, when the economy is on the mend and begins to grow and prosper again, you will watch your investments greatly increase in value.
- Easy Investment: There are so many online brokerages that allow you to buy and sell any stock you please, investing has never been easier. YouTube walks you through step by step how to invest, using what account and there are even videos out there walking you through what stocks to buy based on your preferences. There is no longer the excuse of stock market investing is for the uber-wealthy because now it is attainable for all.
- Diversification Of Your Assets: Do you own a lot of one specific thing? Maybe it is real estate, art, websites. Investing in stocks can be a great way to hedge your risk of being too heavily invested in one asset class so that you can make sure you are not overexposed to any risk.
- Tax Advantages: Depending on the account you choose to use as your investment vehicle, you can receive great tax incentives. For example, investing in a Roth IRA allows you to tax the money you put in at your current tax bracket so you don’t get taxes at all when you are withdrawing the money later on. This is incredibly useful because you won’t have to worry about paying taxes on any money you earned.
Cons Of Investing In Stocks:
- Market Volatility: Especially in today’s market environment, we are seeing incredible swings every day. Stocks hitting all-time highs and all-time lows. This is something you have to be prepared for as an investor. If you are investing in the short-term, then these fluctuations can be quite unnerving however if you are in it for the long-haul, then you know that your investments will increase in value in no time, plus you’re not in a rush to sell.
- Market Crashes: Don’t panic. Crashes are inevitable especially if you are investing in the long-term. Previous crashes have shown that you will earn your investment back in just a couple of years if you weather the storm. That said, that means no selling your investments especially when they’re less than what you bought them for.
- No Guaranteed Return: Although historically, the markets provide a 10% return, there is no guarantee. Especially for short-term investors. The best way to ensure you get your 10% return is to keep your money invested for as long as you can.
- Expensive Fees: Whether you are buying or selling, there can be a fee charged to you the investor by the brokerage you are using. This fee is how they as a brokerage make their money and sometimes it can really screw you over. This is why it is really important to do your research on what brokerage to use and what to buy to help lessen what you owe in fees.
How To Hedge Risks Of Investing In Stocks
- Invest for the long-term, at least with a large portion of your dollars. If you want to day trade, don’t do it with money you can’t afford to lose. Investing for the long-term will help increase your returns as well as weather crashes and volatility.
- Don’t sell or panic. Again, invest for the long-term. Don’t let short-term fluctuations or swings make you sell irrationally.
- Do your research on brokerages you use. Make sure you are choosing to invest where you can get the lowest fees for your purchases.
- Diversify investment types: asset classes, company sizes, domestic vs. international. Stocks alone can help diversify your portfolio but if you are looking to invest in solely stocks, don’t put all of your eggs in one basket. Make sure you do you due diligence and invest accordingly.
While there are many pros of investing in stocks, there are also cons. It is incredibly important to make sure you are doing all of the due diligence you can before putting your hard-earned dollars to work. Hedge all of the risks that apply to you and do your research to make sure your investments make sense for your goals.
Are you invested in any stocks? If yes, which stocks did you choose and why?