Common stocks are one of the most popular investment types available to the public. Individuals invest in common stocks in hope of earning a high rate of return. While many investors find the potential to earn profits advantageous, there are also several disadvantages to owning common stock. Knowing the pros of cons of stock ownership helps you determine if it’s an investment worth your time and money.
Potential for Large Returns
Compared to other types of investments, stock ownership allows investors to potentially earn a large return on their investment. This is a major advantage for individuals who can handle the risks of investing in stocks. Owning common stocks is considered a long-term investment, so many investors who choose to own stocks for many years experience large capital gains when they finally sell their investments.
Another benefit of owning stocks is that you know how much money you stand to lose when you use cash to purchase your investments. You cannot lose more than your initial investment. For example, if you invested $5,000 in a particular stock and the value of the stock dropped significantly, causing you to lose your money, the most you can lose is the initial $5,000 you invested. However, this is not true for investors who purchase stocks on margin. This type of investing can cause you to lose more than your initial investment.
Multiple Earning Possibilities
Common stock ownership not only offers investors a chance to earn a profit through returns on investment, but also through dividends. A company may choose to pay cash or stock dividends to its shareholders when it earns a quarterly profit. Many investors choose to reinvest their dividends to purchase more shares in an effort to increase their return on investment.
Capital Gains Taxes
A disadvantage of owning stock is you must pay a capital gains tax when you sell stock for a profit. Investors must pay a higher short-term capital gain tax for holding their stocks for less than a year. As of the time of publication, the capital gains tax for long-term gains is 15 percent for individuals at or higher than the 25 percent tax bracket, and zero for people below the 25 percent tax bracket. Investors may pay up to a 35 percent capital gains tax for short-term investments. Long-term investment are held a year or longer and short-term investments are held for less than a year.
Risk of Losses
Although stocks possess the ability to earn investors high returns, they are some of the riskier investment types available. When a bear market occurs, some investors lose a substantial part of their investment portfolio. Owning stocks requires you to watch the appreciation and depreciation of your assets to know when to make buy and sell trades.
Owning stocks requires you to possess a fundamental knowledge of finance and investing principles. Before you invest in a stock, you must perform a financial analysis to determine if a stock is worth buying. Many individuals find these financial concepts too complex, and therefore see owning stock as a disadvantage.
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