The stock market offers various investment options such as mutual funds, shares, and others. However, shares seem to provide the highest returns in the long term This also comes with high risk. This is why it is important to know the advantages and disadvantages of investing in the stock market. Investors try to avoid uncertainty through investment diversification in domestic stocks. But for a more stable portfolio, some prefer to invest in foreign stocks. Quickly let’s look at the advantages and disadvantages of the stock market.
Advantages of Stock Market
Well Protected interest by a regulatory body
The stock market is regulated and monitored by the Securities and Exchange Board of India(SEBI). To safeguard the interest of shareholders market participants such as stock exchanges, brokers, advisors and sub-brokers are monitored by SEBI. This also indicates that shareholders of listed companies are more protected and secure than those of unlisted companies.
Ownership stake in a Company
Buying stocks or shares of a public listed company, no matter the size of the share. It allows you to have an ownership stake in the company, giving you proportionate control over the stakes of that company. It also gives you the right to vote and allows you to contribute to the strategic management of the company.
The Probability of Higher Returns Within Short Period
The stock market has the potential of generating increased inflation-beating returns within a short period when compared to other investment options. Abiding by the basic rules of stock trading, planning your trade and doing the needful can help you get higher returns.
High liquidity
The stock market is not like other investment options as you can easily buy and sell shares within seconds through the stock exchange. Stock market investments are of high liquidity without any stipulated investment period.
Tax Benefits
Earnings from other investment options involve high tax rates. Investors in the stock market can claim tax benefits under section 112A of the Income Tax Act, 1961 in long term. Depending on the type of security and if the company is listed or not.
Dividend
Companies provide annual income for their shareholders in form of dividends. Though the case differs for equity shareholders because the amount has to do with the profit of the company that year. Meaning they may not get dividends when there are no profits and the dividends may be of substantial amount when there are huge profits.
Diversification
Diversification of portfolios in the stock market is another important feature of share investments. Investors are allowed to invest in various kinds of securities which help them to reduce risk and increase the chance of profits.
Disadvantages of Stock Market
Subject to High Risk
The stock market is subjected to high risk which means investors can lose their entire investment if care is not taken. Various factors can affect the total performance of the financial markets, some of which can be eliminated through diversification.
Volatility
The stock market is dynamic and volatile which is why it is considered risky as shares can fluctuate and even go very low. The fluctuation in the stock market is not always predictable and as a result, pose risks to investments. Though it can take years for the market to bounce back from a crash, there are low chances of large failure.
Time-consuming
Though since the introduction of online trading it has become easy to trade securities. But all the processes involved in opening a Demat account, registering and researching can be time-consuming.
When you want to buy stocks, you have to research each company. This will help you know how profitable they are before deciding whether to buy or not. You need to learn how to read annual reports, financial statements and follow up on the company in case of any development. And should monitor the stock market all of which are time-consuming.
High brokerage and Low Margin
The internet has made the stock market more accessible to investors. But for smooth functioning of the market, there is a need for brokers. An investor that wants to buy or sell shares will have to pay a certain amount to the broker as brokerage fees. Many brokers charge high brokerage and this will result in a low-profit margin for investors.
Conclusion
The stock market provides investors with the opportunity to grow their money but you need to know that there are risks involved. Whether you are a seasoned investor or novice. Knowing that the stock market is volatile and prone to changes will help you make better investment decisions. Stock trading in India is made easy with the various online trading platforms and brokers available to help you kick start your trading journey. To safeguard your interest as an investor you need to exercise caution.
