Advantages and Disadvantages of Stocks
Bonds and stocks dramatically differ in their payouts, structures, risks and returns. Bonds are a form of debt in which a person is the lender instead of the borrower. A bond is a contractual loan made between the institutions and investors that, in return for financing, pay a premium for borrowing likely known as coupons. Moreover, the face value of bonds is returned to the investor at its maturity. The payback guarantee and all payments of coupon solely rely on the borrower’s ability to generate sufficient cash flow to reimburse bondholders.
A stock is a type of ownership as they represent contribution to a company’s growth. Normally, investors are given no promises about any returns of the initial investment. Indeed, the investment profitability depends almost entirely upon rising stock price, which, at the most essential level, directly relates to the growth and performance of the company.
The Advantages of Stocks
- The stock rate is bound to rise and fall on a daily basis, but if a person looks at his previous records, stocks have proven to be essentially beneficial for its investors.
- The best part about stocks is that most of them are liquid. This implies that they readily can be sold or bought at a fair price.
- As investors, if you bought stocks, you can get a break to participate in the growth of the company. Moreover, if you buy stocks of a particular company, you are entitled to the profits made by them since you are a partial owner.
- The potential loss from stock bought with cash is quite limited to the overall amount of the initial investment. It is better than considerably that of some leveraged transactions, where maximum loss is observed and exceeds the overall funds invested.
- Stocks have the potential of delivering huge amounts of gains compared to certificate of deposit, bonds or other alternatives.
- It also offers 2 ways for their owners to benefit, with dividends and by capital gains.
The Disadvantages of Stocks
- Sometimes, stock values change for no apparent reason that can be quite frustrating for the investor who’s trying to anticipate the behavior of the stock based on the actual performance of their company.
- Prices of stocks tend to be volatile as well. Prices can be rising, erratic and declining fast. Such declines sometimes cause investors to sell and panic, which actually serves only to lock in their losses.
- Investors in a certain company might not know all that there is to know about their company. Due to this insufficient information, making an investment decision is sometimes hard.
- While shareholders are company owners, they don’t enjoy all of the privileges and rights that the owners of privately held companies have. For an instance, they can’t normally brag in and ask for the company’s current books and details.
- Stockholders are also the last one to get paid since the company should pay first their employees, creditors and suppliers. They have to pay their taxes as well.