Advantages and Disadvantages of Investing in Stocks

People who are planning to invest in stocks should definitely have prior knowledge about the various risks involved. Putting large amount of money in stocks is no child's play and it is always good to know the pros and cons of such investments. If you are a working professional and have the basic knowledge of investments, then I'm pretty sure that the thought of investing in stock market must have definitely occurred. After all stocks are tempting and offer an easy way to earn profits. If you want to have a diversified portfolio, it is essential that you put out some money in the market and enjoy its benefits. There are various ways of investing money; mutual funds, real estate, gold, bonds, etc. However, stocks remain the favorite option for investors who want to make huge profits in a short span of time.

Stocks are nothing but a share in the ownership of the company. When investors purchase stocks they represent a claim on the company's profits and earnings. If the investor starts acquiring more and more stock the claim of the investor over the company also becomes more. When an investor buys a stock, he/she gets a stock certificate (a piece of paper) as a proof of the ownership. Today this piece of paper is hardly in use and most of the data is stored electronically which makes it easier for stock trading.

There are two types of stock available in the market - Common Stock and Preferred Stock. Common stock is a popular form of stock and most of the stock trading happens in this type. Common stocks provide investors with ownership of the company and offer share in the company's profits. Most people prefer buying common stocks because they get to participate in the election of board members and yield higher returns which is never fixed. In case of bankruptcy, common stockholders will be the last ones to be paid until the company has paid the money to creditors, employees and bond holders. Preferred stocks also give certain degree of ownership to the stock-holder but with no voting rights. Investors who buy preferred stocks are entitled to receive a fixed dividend forever; this is not the case with common stocks where the amount of the dividends keeps on changing. The best advantage of dealing in preferred stocks are, in time of bankruptcy preferred stockholders are paid before common stockholders.

Pros and Cons of Stock Investment

It is not that difficult to understand how the stock market works. As a beginner, it is advised that you chip in $500 as the initial investment. Most financial consultants will advise not to put in more as it is better to learn the rules of the game before playing it. $500 is the minimum figure with which you can start stock trading. You can also hire an online trader and seek professional guidance before you choose to buy or sell stocks.

Author: Kulbhushaan Raghuvanshi