According to a 2022 poll, nearly half (45%) of all Americans regret not investing in the stock market. If you’re one of the many feeling some financial FOMO – “fear of missing out” — it may be time to start investing, but before you start tossing money into the market, you may want to weigh the pros and cons of buying stocks. Consider the following article your crash course, showing you the pros and cons of investing in stocks, as well as some tips to navigate today’s market.
Pros of Investing in Stocks
While many pros and cons of investing in stocks exist, there’s a clear reason why so many Americans are beginning to find themselves wishing they’d invested more, even after Wall Street experienced its biggest drop since 2008. Stock market investing offers a solid means of building income, whether through day trading or a long-term plan to help you retire poolside.
With that said, here are the primary benefits of investing in stocks:
You don’t have to sink your life savings into the stock market, as even high-dollar stocks offer what are called “fractional shares.” True to their name, investors can buy portions of these single shares, which can save them money while providing access to top-performing companies like Amazon or Nike. In addition, while some brokerage platforms charge administrative fees, many retail brokers allow you to buy and sell with no commissions and no account minimums.
They’re Easy to Buy
Stocks can easily be purchased through a financial planner, stock market broker, or through one of a growing number of investing apps. You can set up an investing account in mere minutes, and through an app, you can monitor your investments and even make trades without ever leaving the couch.
They Protect Against Inflation
Historically, the stock market has delivered an average rate of return of around 10%, and the 10-year annualized rate of return for companies in the S&P 500 index was 15.43%. Even when inflation reached its historical peak of 9.1%, the stock market continued to perform favorably, especially when looked at from a long-term perspective.
They Can Offer Passive Income Through Dividends
Some stocks pay dividends, which are regular payments given to shareholders (either quarterly or annually) meant to attract and retain shareholder loyalty. Shareholders get the benefit of passive income, which they can either cash in directly or reinvest into the company that offered it through Dividend Reinvestment Programs (DRIPs).
They Offer Greater Liquidity than Other Investments
Stocks offer a high degree of liquidity, a trait that refers to how readily an asset can be converted into cash. The stocks in your portfolio can be sold at virtually any point (within normal trading hours, of course). The same can’t be said for other investment vehicles and retirement accounts, which can be difficult to access and cash in prior to their maturity date.
They Support a Growing Economy
The pros and cons of investing aren’t limited to investors. Companies benefit from their investors’ increased cash flow, allowing them to expand and thrive in the marketplace. For investors, that means their money will grow as the economy does or as a company demonstrates favorable performance.
Cons of Investing in Stocks
As you weigh the pros and cons of investing in the stock market, it’s important to consider any and all variables. For every successful tale, there is a horror story to go along with it, and some day traders are even taking to YouTube to help others learn from their mistakes.
Here are some of the downsides and risks of stock market investing:
They Come With Serious Risks
There are no guarantees in life, and the stock market grants no exception. If a company doesn’t perform favorably, other investors may liquidate their shares, causing their values to plummet. Alternatively, a market crash can cause multiple companies and industries to decline, and if you don’t sell your shares in time, you could lose the entirety of your initial investment.
They Take Time to Carefully Research
Investors should research every company carefully before making an investment, paying close attention to their historical financial data, leadership structure, company mission, and industry trends.
However, doing so can be time-consuming, and some industries are continuing to evolve, making the process fickle. Unless they have access to a top-notch stock research platform, this approach can be tedious and ultimately prohibitive for the average investor.
They Involve Capital Gains
Stocks may indeed be more liquid than other investments, but if you sell a stock for a profit, you may be subject to capital gains taxes, which can cut into the money you take home from the sale.
They Can Cause Emotions to Run High
Investors are commonly driven by one of two main emotions: greed and fear, but greed can cause you to snatch up a hot new startup without thinking things through, and fear may cause you to jettison a company at the first sign of trouble.
The point is that although the performance of the market can tempt investors to make a snap decision based on their emotions, they must make educated decisions about their portfolio at all times.
They Bring About Strong Competition
The stock market contains countless other investors, many of whom have the experience, tools, and skill set to navigate the pros and cons of stocks. Since companies have a limited number of shares, it can be difficult to outperform these institutional investors to secure the assets you need.
Tips for Navigating the Pros and Cons of Investing in Stocks
With stocks’ pros and cons, it can undoubtedly be quite a task for investors to make sense of them all before even investing a cent. With that said, here are some tips that can be used to navigate the market and minimize the cons of stock market investing:
Set a Budget
Start by setting a budget for your stock market investments. Knowing to never invest more than you’re prepared to lose sets a limit that you’ll be comfortable with. As you build your portfolio, you can start allocating 10% to 15% of your income to it.
Diversify Your Portfolio
Investors can minimize risk by seeking diversity in their portfolios. Instead of buying stock from only one business, work to purchase multiple companies from a diverse range of industries.
That way, even if one takes a dive, you’ll absorb the loss through your other investments. Many types of funds (mutual funds, index funds, ETFs) offer built-in diversity, which can be a great investment option for beginner investors.
Focus on Long-Term Gains
Don’t let your emotions get the better of you. Buy-and-hold stocks won’t necessarily show you the meteoric growth you might hope for, but they can be solid investments that provide a pathway toward retirement and other goals. Even if you want to sink some money into a new tech startup, a portfolio that contains stable, large-cap companies can help you absorb the risk.
Invest in a Stock Research Platform
Every investor should be a researcher, and although doing so can take some time, the good news is that the best stock research platforms make it easy and fun. Consider investing in a stock research site that provides research tools, stock alerts, and the ability to track the performance of your portfolio so you can make solid investment decisions.
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