Investors must know the advantages and disadvantages of investing in shares of a company in order to properly allocate their resources according to their risk preference. You can an active or a passive investor investing in shares depending on what your long term goal is.
There are people who have made some killings investing in shares of companies and there are also people who have lost their life savings investing in shares. The difference lies in their approach. That is why one must understand the intricacies of a trade or vocation before venturing into it.
8 Advantages of investing in shares
- Takes Care Of Inflation
The efficient market hypothesis theory argues that market mechanism takes care of all factors when fixing the prices of shares of a company. There are evidences to suggest that efficient market hypothesis in fact exist.
The speed at which a market incorporates information when determining shares differs depending on the level of development in the country where the market operates.
If this efficient market hypothesis holds true in your country, then you be rest assured that your capital and investment in shares will not be eroded by inflation. Hence, one of the advantages of investing is shares is that it shields your wealth against being eroded by inflation.
- Somewhat Anonymous
Except you are institutional investor, your identity is always protected when you invest in shares. This is why those that want to live a quite life prefer to invest in shares rather than start a business of their own. Being anonymous is an advantage of investing in shares that many see as priceless especially nowadays that privacy business is a serious business.
- Better Than Money In The Bank
In the long run, the ROI from investing in shares surpasses the interest that any high street commercial bank will pay you. Shareholders wealth is measured through dividends and capital appreciation. A bank will typically stop accruing interest on your bank account after some period of inactivity on the account thereby even making the effective interest earned on your savings even lower than originally quoted.
Unlike investing in shares where you always get your dividend for as long as the company pays dividend and also the share price will always increase as long as the managers of the business continues to invest in projects with positive NPVs.
- Gives Bonus
Shareholders of a company gets bonus from time to time. Again, compared to money in the bank where all you get is interest (if your account is active), share investment apart from paying you dividends and the share prices appreciating in value also gives bonuses.
These bonuses can take different form but the most popular one is share bonus where you get certain ratio of your shareholding in a company.
- Hassle Free
Compared to starting and managing your own business, investing in shares is pretty simple. All you need to do is get a broker who will transact on your behalf. You do not need to get your hands dirty in order to be able to invest in shares and this is a major advantage.
- Shares Can Increase
Companies in a bid to ensure that their stock remains liquid split their shares from time to. This gives your investment the opportunity to grow even without you lifting a finger. I bought 100 units of a blue ship company in 2011 and now (2016) own 1800 units of shares in that company without making any further investment; isn’t that cool?
- Pays Dividends
Dividend income can be a live saver on a rainy day. There are times when I was broke and before I know it a credit alert notification will come to my phone- that is dividend from one of my investments in shares. Dividends are just added advantage to owning shares in companies.
- Capital appreciation
Share investing is a very good example of making your money work harder and smarter for you. If done correctly and with a bit of luck on your side, your share prices will always appreciate in value. As far as am aware, many countries do not have capital gains taxes on capital appreciation from investing in stocks.
4 Disadvantages of investing in shares
Just like everything in life, there is always two sides to every coin. There are some disadvantages of investing in shares which will be discussed next.
- Capital Can Be Lost If A Company Become Bankrupt
You can easily loose both your capital and unclaimed dividends if the company that you invested in should go bankrupt. I have had some ugly experiences where I invested in a company that I thought was too important to fail only for the company to burst within months of me investing in it- ask those that invested in Enron how painful it could be.
- Stock Market May Crash
It is almost like a ritual that the stock market will crash in cycles. There is nothing any investor in shares can do to prevent the stock market from crashing – only regulators can do something but, very difficult for them.
- Susceptible To Fraud
In as much as there are tens of thousands of good stock intermediaries, there are still some unscrupulous ones that will play one or two tricks with you.
The first stock broker that I used for my first investment in shares was a scam that ended up using my money to play the market thereby making me lose out on what would have otherwise been the best investment of my small live. Always do you due diligence before engaging the services of any stockbroker.
- Investment can be lost when investor dies without properly documenting things
Although there are steps that can be taken to prevent this from happening, very many passive investors just don’t care and end up leaving some financial holes in their estate when they die. You have to seek professional advice to make sure that you are properly guided on this.
There are advantages and disadvantages of investing in shares. However, in my opinion, the advantages of investing in shares outweigh the disadvantages of investing in shares. Just be sure to have a strategy in place and understand the fundamentals of financial management.