What is exactly a stock?
To put it simply, a stock represents a percentage of ownership in the underlying company. For example, if there are 100 shares of McDonald's out there and you own 1 share, then you own 1% of McDonalds. However, there are over millions of shares of McDonald's out there. There are some common misconceptions related to stocks that I want to address before getting into the pros and cons of owning a stock.
Common Misconceptions About Owning Stocks 1. Owning a stock does not mean that you can walk into a company and take the property of that company away. For example, you can't just walk into Apple headquarters and take the chairs or tables away for your own personal use. The misconception here is that there is a difference between owning a portion of the company and owning the property of a company. Even huge corporations, like Apple, have loans that they receive from the banks, through the issuance of bonds, and etc. As you know, whenever you walk into a bank requesting a loan for your house, the physical home is the collateral if you default on the mortgage payment. The same goes for corporations except the collateral here are the chairs, tables, buildings, and etc. In other words, the banks are typically the owner of the property of a company. 2. Being a shareholder does not translate to receiving a discount on goods and services. While there are some exceptions to this rule, the issue with giving out a discount is that it can hurt the stock price. Imagine that there are millions of shareholders. If each and every single one of them receive a discount, that would create a large dent in the company's revenue and income, thus, causing a drop in the price of the stock. 3. You can't fire an employee simply because you feel like it. This is because the shares that you own are typically very small compared to the other major shareholders. The senior company executives are the ones that own the majority of the shares, so if anything, they are more worried about the stock's performance than you are. While you can't manage the company being a minor shareholder, you do get to vote for the directors who can if the stocks come with voting rights. With those misconceptions out of the way, let's dive into the list of pros and cons of investing in stocks.
Pros 1. Accessibility: You can use your cellphone to buy and sell stocks within a matter of seconds. You can use online brokerages such as Robinhood which is commission-free. 2. Beat Inflation: Historically, stocks have averaged an annual return of between 7% to 10% while the average annual inflation rate is 2%.
3. Two ways to profit: You can receive a nice return from capital appreciation or through dividends that the company pays out to its shareholders. 4. Profit from the economic expansion: As the economy expands, corporations will see an increase in their earnings. These higher earnings will lead to more jobs in the market, meaning more people will have income to spend, which in turn, it will generate more sales for these companies. As the underlying company consistently beat analyst's expectations, the stock should see an increase in it either its price or a higher dividend yield.
Cons 1. Higher risk: As you know, bonds are relatively safer to invest in than stocks. This is due to the fact that bond holders will receive their investment back before any of the shareholders. With an increase in risk, the shareholders must also pay capital gains taxes if they realized the profits. 2. Time investment: Before purchasing a stock, you must spend a lot of time researching the underlying company. This means that you must learn to read financial statements like 10K and 10Q to see the financial health of the company. You must constantly follow the news of the company to revaluate your position. In addition, you must follow the market itself as the economy could be in a bear market, a crash, or a correction. 3. Must control emotions: As you wake up one morning, you may realize that your investment is down 10%. At this point, you must analyze the reasoning for why the stock took a dive. For example, if former president Trump tweeted something which caused a negative sentiment for the underlying company, nothing about the company has fundamentally changed, so there is no reason for you to panic. However, this will come with experience as you put more time into investing. Overall, it is very important to purchase a variety of stocks to diversify your portfolio. Come up with a plan before you get into investing. Think about what it is you are investing for. For example, you don't wake up one day and decide to run a marathon, you have to prepare yourself for it and plan it accordingly. The same goes with the stock market. Remember, always remain calm and never panic.