Learn The Advantages And Disadvantages Of Common Stock
Common stock advantages and disadvantages is an article where you will find all the necessary information regarding what you need to know.
Furthermore, common stocks are a great form of investment to earn very handsome profits. Stock markets combined have a market cap of over $70 trillion.
There are millions of stock traders buying and selling stocks daily. Common stocks definitely must offer some benefits to garner such worldwide attention.
In this article, we will try to understand what makes stocks such an enticing form of investment and also go through risks and cons of common stocks.
Advantages Of Common Stocks
One of the most lucrative ways of earning decent returns is to invest in the stock market. Although it is risky, there are ways to counter and minimize these risks.
The highlighted advantages of common stocks are:
1. Grow Your Capital:
This is perhaps the most obvious and biggest benefit of owning common stocks. You can passively grow your capital simply by investing in common stocks.
Whether it is an increase in capital gains or increase in stock value, investing in the right stock is always a wise decision to earn stable profits.
2. The Value Increases With The Economy:
The value of common stock increases as the company performs well. This happens in a period when the economy booms as it creates more jobs, more sales, demand, and subsequently, the share value increases with it.
Among common stocks, there is one type of stock whose stock value is directly correlated with the economy. These stocks are called cyclical stocks. Thus you can take advantage of the economic cycle to profit from the stock market.
3. Best Way To Combat Inflation:
The return rate from inflation is statistically higher than the inflation rate. Therefore, holding on to stocks will eventually earn you returns that can offset the inflation rate over that period of time.
4. Profit In Both Directions:
Many have the misconception that you can profit from common stocks only when they rise in price. This is not true at all. You can profit from them even when they fall in price. This works, however, when you trade stocks as CFDs.
When the price of the stock is expected to rise, you buy the stock at the lowered price and sell it when it rises. And when the price is expected to fall, you sell the stock at a higher price than you bought it for.
5. Profit From Both Short-Term And Long-Term Trading:
Stock traders can earn profits whether they are short-term traders (scalpers and day traders) and long term traders.
Short-term traders depend on short trends and aim for small profits. On the other hand, long-term traders buy and hold their positions for a long period of time for bigger long-term gains.
Thus when trading stocks, your trading style doesn’t matter as long as you trade efficiently.
6. Easy Access:
Buying stocks is easier than you think. You can access the stock market quite easily with the help of a broker or buy directly from the company that issues the stock.
It takes a few minutes to set up your online account and starts trading stocks. As more and more brokers emerge, the fees and commissions have become more competitive and service top-notch.
With mobile apps, you can place a buy order for stocks with the click of a single button.
7. Diversifying Your Portfolio:
When you browse the stock market, you will find thousands of stocks belonging to different companies all across the globe.
You can diversify your stocks by investing in companies from different sectors. This will ensure you don’t lose money on a single trade. Losses from one trade will be offset by profits from other trade.
By diversifying your portfolio, you can customize your trading strategy for better results.
8. Ownership Benefits:
When you buy common stocks, you are entitled to certain ownership rights. Each share represents a portion of ownership in the company.
They also get to vote and choose the corporate board members and important business decisions. Other stocks such as preferred stocks don’t have these ownership privileges.
Disadvantages Of Common Stocks
Along with the benefits, there are certain risks and liabilities to owning common stocks. We will discuss them in this section here:
1. Risk Of Losing Your Entire Investment:
If the company you invested in goes bankrupt and ends up liquidating, you could end up losing your entire investment.
When a company performs poorly, it’s stock value falls rapidly, and you end up selling your shares at a lower value than you purchased. Thus, there is always an element of risk involved with common stocks.
2. Lowest Priority In Dividend Payments:
Bondholders and preferred stockholders get paid dividends before common stock owners. The company invests some of the profits back into the company for its growth and expansion.
The debts are also paid off with these profits. If there is anything left, they are distributed among the common shareholders.
3. No Guarantee Of Dividend Payment:
Companies only pay dividends when they earn profits. Even when a company ends up profitable, common stockholders are not guaranteed dividend payments.
The company is not liable to pay these shareholders dividend payments, unlike preferred shareholders.
4. Time-consuming And Complicated To Invest In The Right Stock:
Even though it is easy to access the stock market, it is not at all easy to find the right stock to invest in that will bring your great profits.
Moreover, you need to shortlist a few companies and perform market research on them by analyzing their financial and annual reports, and earnings reports.
You also have to monitor their price charts and evaluate their historical performance. Thus, investing in stocks can be intimidating for someone who new to invest and want quick returns.
5. Not For The Faint-Hearted:
Let’s face it: the stock market is volatile and unpredictable. Nobody can say for sure what the price of the stock will be at any given point in time.
When you decide to enter the stock market, you need to be prepared to lose money. Your mindset needs to be prepared for the fact that you could lose all your investment.
You need to control your greed when investing in stocks. These things are not possible if you have a fragile and weak mind.
Conclusion
In this article, we discussed the pros and cons of common stocks. They are stocks issued by the company to fund its expenses and offer the investors a stake of the ownership in the company.
If you are someone who’s interested to venture into the stock market, you will different types of stocks such as common and preferred stocks.
To understand which one will be beneficial, you need to go through the positives and negatives of each stock type. Here, you can go through the advantages and disadvantages of common stocks and decide if it is the right investment type for you.
