Advantages & Disadvantages of Investing in Stock Market
In this article we are going to discuss the pros and cons of investing in share market. We have seen, the stock market has provided handsome returns to its investors in long and very short period time as well, but stock markets also fall down, bringing investors huge amount of loss.
Advantages of Investing in Share Market
Investment Gains: One of the main advantage of investing in stock market is to increase money & wealth for long or short time. If you invest in a stable company then your chances of return would be much higher on the investments you made. For an example there was an incident where a person called in Zee News who’s grandfather bought shares of MRF Limited in 1990 worth Rs.20,000. The current valuation of those share is more than Rs. 140 crores.
Dividend income: Usually not every companies issue dividends, however there are few companies in the share market who issue dividend regularly. If you want to know more about dividends please read Basic Terms of Stock Market. Dividend has added advantages to its investors, as the investor does not need to sell his/ her shares to earn it, if a company issues dividend and you already have purchased shares of that company, by default you are eligible to earn that amount of dividend multiplied by the numbers of share you hold. For an example, XYZ Limited announced dividend of Rs. 1 each share, and you have 100 shares of that company. In that case you are bound to receive Rs.100 extra as dividend without any need to sell those shares. Dividend income could help you fund a retirement or pay for further investing as you grow your investment portfolio over time.
Diversification: Billionaire Warren Buffet says “Don’t put all your eggs in one Basket”. That means you never should invest all your money in one stock or company. As the price of the stock might fall with the time due to poor performance or lack of investor demand. And if that happens you loose all your money. However if you invest in 10 different companies and 5 of them fail, even you will have 5 companies’ stock to support the loss you had from those companies failed. Diversification is not limited to shares only, you can diversify and invest in real estate, bonds, mutual funds, etc along with shares and keep increasing their potential for large, rapid gains.
Ownership: Investing in a share means having an ownership in that particular company. Equity share holders enjoy the right to vote on important company decisions. For an example recently Government of India has announced merger of United Bank of India, Punjab National Bank and Oriental Bank of Commerce. Since the government is the largest stake holder in these three banks the merger will be approved by the shareholders. If government was not the largest shareholders in these three banks, the investors or shareholders could stop the merger if they see the merger is against their and bank’s interest.
Protection against Inflation: Reports indicate shares have an annual rate return of 10%. Currently our rate of Inflation is 3.43%. That means every year our money gets devalued at 3.43% rate. So, if you plan to keep all your money in Savings Account and earn 3.50% rate of interest, then your money will increase at 0.07% rate per annum. Investing in stocks is better as it offers 10% rate of return on an average, than the inflation rate of 3.2%. Over the years, ordinary stocks have won the battle against inflation rate providing enough returns and growth.
Easy to buy: The stock market has made it easy, to buy shares of companies. You can buy shares either through a broker, a financial planner or online by yourself. Once you made a Demat account, you may purchase stocks in minutes through many online brokers like SBI, ICICI, HDFC, BOB, PNB etc. There are lots of brokers who charge no or very less amount of brokerage to purchase stocks.
Easy to sell: The stock market enables you to sell your stocks at any point of time. Economists use the term “liquid” to mean that you can turn your shares into cash quickly and with low or no transaction costs. Unlike other modes of investment such as real estate, mutual fund etc you cannot sell shares any point of time no matter what the market conditions are.
Great Post Tax Earnings: Tax is another factor eating up gains, investing in ordinary shares helps you to maintain the rate of returns on investment. If you purchase a share of Rs.10 and sell it for Rs.20 that gets treated as capital gain. For long term capital gains where a stock was held for more than 12 months, it attracts 10% income tax in India. Whereas short term capital gain where stocks were held for less than 12 months, attracts 15% income tax in India.
Well-Regulated and Transparent Framework: Being a part of the global economy, stock markets are well regulated and transparent to satisfy investor's needs in terms of evaluation, pricing, disclosures to ensure that no investor runs the risk of hidden propaganda or manipulation anytime, anywhere. As far India is concerned, all shares which are traded in Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are governed by the Security Exchange Board of India (SEBI) which is a central government governing body, which provides transparent, well-regulated framework and platform for exchange, trade and investment of stocks. This significantly helps in reducing risks to fraudulent activities by companies.
Convenience: Stock exchanges are now available all over digital platforms making it more easy for investors to buy stocks and sell them in the stock market with a few swipes and taps on the smart phone. Along with the facilitating purchase and sell of stocks, stock exchanges also provide valuable information such as financial results, news, updates on market rumours to every investors through their websites.
Disadvantages of Investing in Share Market
Risk loosing investment: Usually stock markets are volatile and dynamic, investing in stocks involves its own risks, as share prices may rise and fall multiple times within a single day. You may loose your entire investment if you are not well educated and prepared about the stock you are investing on. If a company performs poorly, investors start seling their shares resulting in crashing down of stock price. Moreover, chances of big failure are not usual. However if that happens, it may take several years for the market to recover impact of crash.
High Brokerage and Low Margin: The investor have to pay certain amount of brokerage fees to the brokers whenever he/she wants to buy or sell shares, no matter the investor is making any profit or loss. This can seriously hamper profit gains. There are some brokers who charge higher brokerage fees than usual. If you aren’t aware of brokerage rate you might select the wrong broker where you would require to pay higher brokerage charges.
Loss of Time: If an investor is buying stocks on his own he/she must do research on each company to decide how profitable it could be, before buying the stock. You must have the knowledge, to read financial statements and annual reports and watch your company’s development in financial news. You also need to monitor the stock market and the stock price on your own which might require lot of time at the initial stage of learning. Even after you learn about stocks, you have to dedicate time everyday or week to research about your investments and the companies you are interested on, for future investment, and not everyone can afford to do that.
Impulsive Behavior: The price of Stocks may rise and fall every second, investors may want to buy it out of greed and sell them in lower price out of fear. It means you need to know when to buy or sell stocks. Many new investors hold their stocks more than the time they should, which result loss or reduced profit. On the other hand new comers wait for a stock price to fall more, before purchasing the stock, waiting for more time can increase the stock price and they run out of option to buy that stock on right time and price. The investors always have to keep a sharp watch over price fluctuations of stocks. This price fluctuations can create tremendous emotional strain on investors.
Political Conditions: The national and international events like, elections, political instability, exit polls, crime, chaos, etc., have seen to have severe effects on stock markets. For an example current trade and tariff war between United States and China is taking its toll in global and Indian stock market as well.
Lack of Knowledge: Investors who don’t have proper and enough knowledge of stocks may have to bear heavy losses. As they are not aware of which stock to buy or or sell and when to buy or sell. Many amateur investors lack the sincerity, dedication, will to invest their time learning about stock market first before investing. They assume since they have the money and will, they can make money out of stock market.
Other Conditions: Other conditions like, Financial Crisis, bankruptcy, crude oil prices, currency fluctuations, various internal factors, terrorist attacks etc,. might bring negative impacts on stock market. On 11th September when world trade center was attacked entire global stock market shrunk.
Investing in shares could be rewarding, both personally and financially although there are risks involved. You need know how to keep your calm and cool. For beginners it is always recommended learning about stock market first before investing. And if you decide to invest in stock market for the first time, then invest only amount you are willing to see as loss. You also need to do your research properly to understand risks and rewards. Always have a strategy or a plan that works in your favour and you will be happy and prosperous in stock market.