Benefits of Investing in the Stock Market

You have a lot of choices when it comes to your money. You could buy something fun like a flat-screen TV or a boat, you could remodel your house or you could even take that dream vacation around the world you’ve been dreaming of. On the other hand, if you wanted to be a little more practical, you could put your money to work for you and invest it in the stock market.

Let’s face it. Spending your money is a lot more fun than saving your money. So why is it that you are here learning how to save and invest your money instead of out somewhere spending your money? The answer: benefits.
Investing in the stock market provides many benefits to individual investors. While this list is by no means exhaustive, we will be discussing the following benefits:
- Compound Interest
- Time Value of Money
- Tax Deferral
- Diversification

Compound Interest
Compound Interest is a miracle of the financial world. Compound interest, when given time, helps your money grow faster and faster.

Time Value of Money
The Time Value of Money is a simple concept. Basically, it means that the more time you give your money to work for you, the more your money will make for you.

Tax Deferral
Tax Deferral is the greatest investing benefit the U.S. government has given to individual investors. The ability to delay paying taxes on your money can virtually double your investment power.

Diversification enables you to spread out your risk so you don’t have to put all of your hopes and dreams behind the success of a single investment.

Read here how to get benefits from shares?

Advantage and disadvantage

Every share of common stock represents a proportional ownership, or equity, in a company. If a company has only one share of common stock and an investor owns it, the investor owns the entire company and is entitled to one hundred percent of the company’s profits. If a company has 100,000 shares of common stock and an investor owns one of them, then the investor owns 1/100,000th of the company, and as such, has an interest in 1/100,000th of the company’s profits.

Common stock has a number of advantages which make it a desirable investment vehicle, some of which are listed below:
  • Common stock has the potential for delivering very large gains, unlike bonds, Certificates of Deposit, or some other alternatives. Annual returns-on-investment (ROIs) of over 100% have occurred on a somewhat regular basis.
  • The potential loss from stock purchased with cash is limited to the total amount of the initial investment. This is considerably better than that of some leveraged transactions, where the maximum loss can well exceed the total of the funds invested.
  • Stocks offer limited legal liability. Passive stockholders (those who take no active part in the running of the company) are protected against any liability stemming from the company’s actions beyond their financial investment in the company.
  • Most stocks are very liquid; in other words, they can be bought and sold quickly at a fair price.
  • Although past performance is not a guarantee of future performance, stocks have historically offered very high returns in relation to other investments.
  • Stocks offer two ways for their owners to benefit, by capital gains and with dividends. As previously stated, each share of stock represents partial ownership in a company. If the company becomes more valuable, so will the ownership interest represented by each share of stock. This appreciation of the stock’s value is known as a capital gain. In addition, if the company earns more profits than it needs to support its maintenance and growth, it may elect to distribute the excess to its owners, the shareholders. The periodic distributions of profits are called dividend payments.
While there are numerous advantages, common stocks, like all investments, have some distinct disadvantages which investors must remain aware of:
  • Since common stock represents ownership of a business, stockholders are the last to get paid, like all other owners. A company must first pay its employees, suppliers, creditors, maintain its facilities and pay its taxes. Any money left can then be distributed among its owners.
  • While shareholders are company owners, they do not enjoy all of the rights and privileges that the owners of privately held companies do. For example, they cannot normally walk in and demand to review in detail the company’s books.
  • Investors in a company may not know all that there is to know about the company. This limited information can sometimes cause investment decision-making to be difficult.
  • Stock prices tend to be volatile. Prices can be erratic, rising and declining quickly. Such declines often cause investors to panic and sell, which actually only serves to lock in their losses.
  • Stock values can sometimes change for no apparent reason, which can be quite frustrating for the investor who is trying to anticipate the stock’s behavior based on the actual performance of the company.

When you own a common stock, you own a piece of a larger business. For a young investor, this is a way to get a small piece of bigger action. But like any investment, there are advantages and disadvantages to common stock. Consider these pros and cons before making your own investment choices.

Limited Liability
One of the best advantages of commons stocks is that they allow you to invest in a business with only a limited liability. This is because your liability is limited to the amount of your investment. So if you invest $1,000 in a company, for example, that's the most you can lose. This is good news if your investment goes bad and the business ends up owing creditors a lot of money.

Last to Get Paid
An important disadvantage of common stock is that if the company is liquidated, you likely will not see a dime. This is because common stockholders are last in the pecking order. Bondholders, other debt holders and preferred stockholders must be paid what they are owed before money would be distributed to common stockholders. If there's nothing left — you're out of luck.

High Potential Earning
Common stocks have the advantage of offering a high earning potential. Compared to bonds or certificates of deposit, they provide a better opportunity to make a larger return on investment. These other investments are guaranteed, so you know the minimum and maximum amount that you stand to gain from them. However, common stocks have no limit. While this means that you may lose money, it also means that there is no limit to how much you can gain.

Lack of Control
A disadvantage of common stocks is that it can be difficult or impossible to exercise control over your investment. If you invest in your own business, you can make decisions about your strategy and business practices. When you invest in common stock, you are subjected to the will of other stockholders. The only way to gain control is to gain a majority share in the investment — an expensive proposition for most corporations


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