Successful stock investing requires a willingness to accept the risk that the shares you buy may decline in value. Investors should also have a keen interest in the factors that affect stock prices -- those related to the individual company and to the economy as a whole. This understanding allows the individual investor to better predict when he should buy or sell shares.
Cons -- Volatility
The stock market experiences violent up and down swings in prices, which is termed market volatility. For example, in 2003 stocks earned an annual return of 28.36 percent, and in 2008 stocks lost 36.55 percent of their value. One investment philosophy is termed "buy and hold." Its concept is that if you accumulate stocks and hold them for the long term, your portfolio will do well because over time the market as a whole delivers better returns than safer investments such as savings accounts. Not all market experts agree with the philosophy, however. Joe Terranova, who appears on the CNBC investment program Fast Money, has written a book titled "Buy High, Sell Higher" with the subtitle "Why Buy-and-Hold is Dead." Some investors have trouble dealing with the wild swings the market takes and may be better off in safer investments.
Pros -- Abundant Choices
With the large number of publicly traded companies -- more than 2,000 on the New York Stock Exchange alone -- as well as other stock investment vehicles such as mutual funds, investors can assemble a portfolio that meets whatever investment objectives they may have. Some prefer companies that outperform the market when the market is rising. Others prefer stable companies with solid earnings growth and generous dividend payouts. The vast array of mutual funds allows an investor to be diversified across industries, company size -- referred to as large cap and small cap -- and even by country.
Cons -- Investing Can Be Time-Consuming
Even if you choose mutual funds -- allowing professional stock analysts and traders to in effect select a group of stocks for you -- a small investor still faces the challenge of which mutual funds to buy. Making these decisions requires substantial research. Fortunately, online trading accounts provide investors with a wealth of research data about individual stocks and mutual funds. If the investor is interested, he can hone his skills in technical analysis, which means attempting to identify the best times to buy or sell a stock based on the chart of its stock performance in the past. Time is also required for an investor to review his stock selections at least quarterly to see if any changes need to be made based on how the stocks and mutual funds have performed and how his investment goals have evolved.
Pros -- Liquidity
With the exception of stocks that have a very low trading volume, if an investor wishes to sell a stock, the transaction -- trade -- can be executed almost instantly. This gives investors the peace of mind that if they want to get their money out of a particular stock -- or the market as a whole -- they can do so without delay. Real estate, for example, is not a liquid investment. There are times when buyers are extremely scarce, frustrating homeowners with a desire to sell. Exiting a real estate investment can take 90 or 180 days or more.
Pros -- Opportunity for Substantial Returns
Small investors may be drawn to the stock market because of the challenge of trying to pick the next big "winners" before other investors do. But the primary reason people purchase stocks is because compared with other investment vehicles, the historical returns stock investors receive have been higher. Between 1928 and 2011, the average return on stocks was 11.2 percent compared with 3.66 percent on U.S. Treasury bills.
- NYU.edu: Annual Returns on Stocks, T. Bonds and T. Bills: 1928-Current
- Buy High, Sell Higher; Joe Terranova
- wall street with flag image by Tomasz Cebo from Fotolia.com