Should I Buy Stocks? Pros and Cons of Buying and Investing in Shares of Stocks
You can become a millionaire by winning the lottery, getting a big inheritance, or robbing a bank, but most people have to do it the slow way. They get richer day by day by increasing their revenue, decreasing their expenses, and investing the difference wisely.
No matter how they earned their wealth, one of the many options millionaires and all other investors have to invest their wealth is to buy stock certificates. This hub describes the advantages and disadvantages of investing in shares of stocks, and shows you how to buy stocks.
Advantages of Buying Stocks
There are many advantages to buying stocks:
- When you buy shares of stock, you become a part-owner of a company. There is satisfaction in being an owner of a company that produces something important or has great values. When the company does well, you can be proud to own a piece of it.
- Buying stock made me feel like a grown-up in the world of finance. When I had stock from two different companies (the companies I worked for), I felt pride in having a portfolio, even when I only had one share of stock from one of the companies.
- If you buy shares of stock directly and not through a mutual fund, you generally do not have to pay any fees beyond the purchase and sale of the stock.
- Stock certificates do not have a maturity date, so you can hold on to them for a long time without having to worry about finding new investments, unless the company stops doing as you expect.
- Most importantly, stocks are one of the few investments that can increase in value above the rate of inflation. Most other investments, like savings accounts and bonds, generally cannot keep up with the rate of inflation.
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Disadvantages of Buying Stocks
Stock prices are very volatile. They go up and down based on what the company does, but they also go up and down based on what the economy does, what some other company does, what the government does, and just about everything else. Seeing the price go up and down can be scary, especially since it is your hard-earned money, and you are thinking about your future and your retirement.
It is possible to lose your original investment when you buy stocks. If you made a bad investment decision, and the company goes belly up, you will lose a substantial portion, if not all, of your investment. Your principal is not guaranteed.
The biggest problem with owning stock, in my opinion, is that your brain and your heart want to do two different things at the same time. You read the mantra, "Buy low, sell high," and understand it. Of course, you want to buy when prices are low and sell when prices are high. It makes perfect sense to your brain. Why would you want to do it any other way?
The little problem to this mantra is that you don't really know when prices are low or high. They might continue to rise or they might reverse direction. You might get greedy and think you can to wait a little bit longer to get a better deal.
And then there is your heart. Your heart doesn't want to buy stocks when there is a stock market crash, it wants to sell everything and hide the money in mattress. It doesn't want to sell when the stock is doing so well, it wants to buy more. Other people's hearts are also feeling the same way, so everybody else is selling when the stock market crashes, and it makes sense for you to do the same.
My stomach starts getting upset when my brain and my heart are fighting. You have to have a strong stomach to buy stocks.
Millionaire Tips on Investing in Stocks
I personally think everyone should own some shares of stock. She should buy stocks to a specific company that she chose herself. She can feel pride in being a part owner of the company. She can learn how the value of the stock fluctuates with each quarterly report or company announcement. She can also see how the value fluctuates with what the market is doing, and can really understand how the stock market works. She can also learn with this small amount of stock whether she has the stomach to handle a bigger investment in the stock market.
Instead of investing in one company, and losing your life savings if the company goes belly up, it is best to diversify your investments and invest in a number of companies. That way, if one of them goes belly up, you still have money invested in other companies that might be doing well.
Diversify your Stock Investments
I order to get diversify, and make sure you don't put all your eggs in one basket, you will need to buy a lot of stocks. It is usually too much work for a person to try to keep up with that many companies, and most people do not have enough money to properly diversify in a hundred or so different companies. People who want to own stock generally find that buying a mutual fund is a better way to diversify their holdings and keep the workload manageable. For the price of a management fee, they can let an experienced and knowledgeable investment manager keep track of the holdings, and buy and sell stocks when the market conditions are proper to do so, and hopefully become richer day by day.
Invest for the Long Term
It is also important to look at investing in stocks as a long term proposition. Although the stock market is very volatile in the short term, over time, it tends to provide higher returns than other investments. If you can plan ahead and be patient, you can wait until the stock market is climbing when you sell your investment. In this way, you can make sure that you always Buy Low and Sell High.
© 2011-2012 Millionaire Tips
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