Risking personal money for a potential gain is a big step for some individuals. Investors willing to take the risk often use their personal finances to invest in the stock market. The stock market is an exchange place where investors meet to buy and sell shares. Historically, the stock market has experienced positive returns over the long run, but there are advantages and disadvantages of investing in the stock market.
Return on Investment
Historical returns related to stock market investing outperform many other types of investments. According to Vanguard, the historical average return for stocks from 1926 to 2011 is 9.9 percent. In contrast, the average return for bonds during the same period is 5.6 percent. Placing your personal finances in the stock market gives you the opportunity to grow your finances over the long-term. Many well-established companies also pay dividends to investors, which increases your overall return on investment.
Investing in the stock market is one of the easiest ways to become a minority owner within a company. When you buy shares of a company’s stock, you take an ownership stake in the business. Although the ownership percentage is relatively small, you receive the right to vote on certain business decisions and corporate leadership. Unlike some other types of businesses, you can easily exit out of your ownership stake by simply selling the shares to someone else desiring to invest in the stock market.
Subject to Higher Risk
When investing in the stock market, the higher the return the greater the risk of losing money. Stock market prices are linked to the issuing company’s earnings. When a company is experiencing financial difficulties, the price of the stock can decline rapidly. Stock market volatility can lead to a substantial loss of investment. If the majority of the market is experiencing loss and leaving the market because of economic factors, you may find it difficult to sell your shares to someone else.
Investing in the stock market is not like playing the lottery. You need to perform research and investment analysis to find potentially profitable stock. For many individuals, investing in the stock market is a time-consuming, complex task. Even after you find a stock to buy, you must monitor the movement of the stock’s price. Although many investors implement a long-term buy and hold strategy, it is important to know when to exit a stock position if it turns out to be a bad investment choice.