Investing in stocks: benefits and drawbacks

For the informed investor, buying and selling stocks is exciting and lucrative. You use ratios to measure the financial soundness of the company, perform technical analysis to work out the trend and decide whether you wish to go long or short on a stock. Successful investors learn from their mistakes and make the necessary adjustments.

Advantages of investing in stocks

Capital growth
Investing in the right company at the optimal time can lead to staggering capital appreciation. For example, investing technology and biotechnology stocks before the market surged created overnight millionaires. The more cautious are able to invest in a portfolio of established companies and benefit from a steady growth in capital. Yields and dividends
It is hard to find a savings account which enables your savings to keep pace with inflation. Investing in stock, particularly blue chip companies, enable you to enjoy a healthy yield. Several leading execution-only brokers, including Charles Schwab, allow you to invest any dividends in additional stock for no charge. Interesting and enjoyable
For many investors, the attraction of online stock trading is the excitement which comes from seeing their research pay off. Choice
Investors are able to put their money into any sector in the world's leading markets. Ease and convenience
Buying stocks on line can be performed 24 hours a day from the comfort of your own home.

Disadvantages of investing in stocks

Loss of capital
Investing in shares is about assessing whether or not a stock represents value. Rookie investors often fall into the trap of buying shares in a once great company which are now in a state of terminal decline. The price may be at an historic low and appear very enticing. However, the company may be at the brink of going out of business. You could lose everything. Buying at the top of the market
Many small investors have a herd mentality and are easily shaken out by market makers who are trying to fill a large institutional order. Buying stocks and shares when everyone feels the same way is a strategy which is doomed to failure. This is because good news is already factored into the price. Buy on the rumour, sell on the news. Recovery time
If you make the wrong investments, you will either have to cut your losses or wait a long time to see a recovery. This would be the case if you bought in at the top of the market, just before there was a stock market crash. Brokerage fees
If you are only investing a small sum of money, paying a fixed rate to place the trade can make it harder to make a profit.