Advantages and Disadvantages of Stock Market Investing
There are many kinds of investments to choose from, but none have shown the consistent long term performance of a diversified portfolio of stocks. Stock market investing can offer an excellent way to build long term wealth over time. Of course, there are risks as well as rewards to investing in the stock market, and those risks and rewards are the focus of this article.
Some of the biggest advantages to investing in the stock market include:
- Superior long term performance – over the long term, stocks have consistently provided better returns than any other type of investment.
- Stocks have consistently stayed ahead of the inflation rate, something that is not always true of bonds and other fixed income investments. For instance, if your money market is yielding 2% a year, but inflation is 3%, you are actually losing money. The returns of the stock market provide investors with a better chance of staying ahead of inflation.
- Owning stocks allows the investor to participate in the growth of the economy. When you buy shares of stock, you actually become part owner of the company, and you therefore are entitled to share in the good fortunes of that company.
- Stocks can be an excellent choice for retirement vehicles, especially for those with a long time to retirement. The longer your time horizon, the more valuable stocks can be. A long time horizon will help to even out the inevitable ups and downs of the market.
Of course these advantages do not come without their challenges. Some of the major disadvantages of investing in the stock market include:
- Stocks are volatile investments. The price of a single stock can vary quite widely from day to day, and the factors that cause these price fluctuations are beyond the control of the investor.
- Buying a widely diversified basket of stocks can be difficult for all but the wealthiest investor. Small investors are better off buying a quality stock mutual fund. Mutual funds pool the investments of many different people in order to buy a diversified set of stocks. This diversified approach helps to reduce the risk inherent in the stock market.
- As investors near retirement, the amount of stocks in the portfolio should be reduced. Investors who are close to retirement age can no longer afford to take chances with their money, and that means moving a significant portion of their retirement funds to safer and more stable investments.
- Buying and selling stocks costs money in the form of brokerage commissions, and many brokerage firms charge account maintenance fees as well. It is important to look for low cost alternatives when buying and selling stocks.