If you plan to begin investing money for education expenses, retirement or even a family vacation, you may wonder which types of investments you should choose. If you have a moderate to high tolerance for risk, owning stocks may be an appropriate investment option. Choosing stock ownership as an investment strategy can offer several advantages.
High Potential for Return
Because the value of a stock is tied to the performance of a company, it can dramatically increase in value when the company meets or exceeds financial objectives or negotiates profitable acquisitions. If a company experiences continued profitability, the value of your stock can continue increasing. This means that if you invest in a strong, forward-thinking company, stocks can offer a high potential for return when you sell these investments.
Limited Potential for Loss
Unlike leveraged investments, which allow you to use borrowed money to invest, stocks have a limited potential for loss. Although a stock may potentially lose its entire value, you can only lose the amount you invest out of pocket. This means that, as long as you do not invest earnings you cannot afford to lose, owning stocks will not put you into debt.
High-performing stocks may split, which doubles the number of company shares you own. Although a split reduces the value of each new share by 50 percent, the split shares may increase in value if the company continues profitable business practices. Over time, this can dramatically increase the value of your stock investment.
Investors typically purchase stocks with the hope of selling them at a higher price and realizing the difference, called capital gains, as profit. However, stocks may also provide another source of income. If a company earns higher profits than it needs to support company operations and profitable growth, it may distribute a portion of its profits to shareholders as dividends. However, not all publicly traded companies offer dividends to shareholders.
- "Stock Investing for Dummies, Third Edition"; Paul Mladjenovic; 2009
- Financial Web: Common Stock -- Advantages and Disadvantages