Why Investors Use Stocks

Stocks are a popular and accessible way to participate in the financial markets. However there are some distinct disadvantages to trading stocks that investors must be aware of.

The following is a non-exhaustive list of such advantages and disadvantages.

Some advantages

  • Upside Potential. One of the primary advantages of investing in stocks is the possibility for strong returns. As companies grow, the value of their shares typically increases. If you buy a position at one price, and in five years the price doubles, you benefit from this growth.
  • Accessibility. There are many stocks available in the market today. With proper research and analysis, anybody with sufficient capital can participate in stock trading.
  • Liquidity. The stocks traded in the market also have greater liquidity than other securities, meaning that they can be easily sold and converted into cash.
  • Dividends. Many companies distribute a portion of their earnings to stockholders in the form of a cash dividend. Dividend payments can provide stockholders with a regular form of income and provide value beyond the actual price of the stock itself.

Some disadvantages

  • Volatility. Stock prices tend to change quickly, rising or falling suddenly, sometimes for no apparent reason. A sudden drop in share price may cause some investors to panic and sell, furthering the price declines.
  • Limited Ownership Rights. Although every share represents a small stake in the company, holders of common stock usually are minority shareholders only and do not necessarily enjoy all the privileges of ownership that larger stakeholders have. A company must pay its creditors, employees and suppliers before distributing money to its common shareholders.
  • Limited Information. Investors may not be privy to all the information there is to know about a company, which can make picking stocks or other investing decisions difficult.