Investing in stocks is a great way to build wealth. Stocks are an investment in a company, and the value of the stock will rise or fall based on how well that company does. If you invest in a good company, your stock should increase in value over time.
There are many pros to investing in stocks, but some drawbacks can make you think twice about investing. Here are some pros and cons of investing in stocks to help you make an informed decision.
Table of Contents
The pros of investing in stocks
1. Gains over time
As long as the market is up, investing in stocks can help you build wealth over time. For example, if you invested $5,000 into stock mutual funds that returned 10% annually after five years, you’d have almost $6,000 — which means you’ve made more than $1,000 just by holding on to your investment for five years without touching it! If you’re looking for even bigger gains over time, look at dividend stocks that pay monthly or quarterly dividends that could increase your total return over time.
2. Diversification
Stocks offer diversification because they aren’t dependent on one industry or company like bonds. By owning different types of stocks across various industries and sectors, and geographic areas (based on where they’re headquartered), you can limit your risk exposure and potentially protect yourself from losses if one company does poorly.
3. Low maintenance
You don’t need to spend time researching companies or monitoring their performance — your broker does this for you. If you have an under-performing investment, sell it and pick another one.
4. Liquidity
Stocks are easy to buy and sell quickly — sometimes within minutes — so if you need cash, it’s easy to get out at any time without waiting for weeks or months for a sale, like with bonds or other investments that trade over the counter.
5. You control your investments
When you invest in stocks, you buy a piece of the company that issued it. Then, as an owner of the company, you get to vote on issues that affect its future and receive dividends from its earnings.
6. Best way to stay ahead of inflation
Stocks are the best way to stay ahead of inflation. Inflation is a major concern for investors and retirees. Stocks have an advantage over other investments because they produce dividends. Dividends are the payments made by companies to their shareholders based on profits.
Dividends are an important part of your investment returns because they provide you with extra money each year. This means that if you’re investing in stocks, you can get a higher rate of return than if you were investing in bonds or CDs.
The stock market has historically been one of the best ways for investors to gain wealth over time. For example, the average annual return for the S&P 500 since 1928 has been about 10%. That means if you invested $100 at that time, you would have about $1 million today!
7. Stocks are easy to invest in and have low minimums for initial investments
There are plenty of places to buy stocks, such as online brokerages and mutual funds, which can make investing easier for people who don’t have time to research individual companies.
Some mutual funds require an initial investment of $10,000 or more, but most online brokers let you open an account with relatively little money (for example, TD Ameritrade requires just $0).
Cons of investing in stocks
1. Costs
Stock purchases typically involve commissions and fees, which can consume a large portion of your investment. Even if you choose to invest through an exchange-traded fund (ETF), which often has lower fees than traditional mutual funds, you’ll still pay a fee — around 0.2% per year or more.
2. Volatility
Stock prices can fluctuate dramatically over short periods, sometimes within just minutes or hours. The stock market is highly volatile, so even if you have a long time horizon before you need to tap your investments, you may still see big swings in value over the years.
3. Lack of control
While you can influence how much money you put into stocks, there’s no guarantee that they will perform well over time — especially if they’re not part of a well-balanced portfolio that includes bonds and other assets.
4. Information risk
It can be difficult to find accurate business information about individual companies and their prospects for growth or decline in value.
5. Liquidity risk
You might have to sell your shares when they aren’t trading well. For example, if the market crashes and investors panic, there might not be any buyers for your stock at all.
6. Counterparty risk
When you buy stocks through a broker, you’re actually buying shares from another investor — not from the company itself — so there’s always a chance that your broker will go out of business or otherwise fail to live up to its obligations. This is why choosing a reputable brokerage firm when investing in stocks, and other securities is important.
Conclusion
It’s great to be optimistic, but there’s no sense in letting your guard down completely. There are plenty of legitimate reasons to consider a balanced investment portfolio that includes stocks, but there are also some downsides. What you do is up to you; we hope the pros and cons of investing in stocks help you make an informed decision.
