Advantages and Disadvantages of Trading Shares

Trading shares or commonly known as stock market trading are widely popular across the globe, with billions traded in company securities and assets across many millions of investors. For the businesses selling their securities, stock market trading provides a key mechanism for raising finance, while also giving life to pensions, savings funds, and individual investment portfolios.

See Also: Who Controls the Stock Market?

However, like any activity, stock market trading has both advantages and disadvantages that must be weighed up in determining whether it’s a worthwhile pursuit.

Advantages

  • Rate of Return

Perhaps the main advantage stock market trading brings to the table is its natural ability to deliver significant rates of returns. Compared with an interest-bearing bank account which might pay 5% per annum if you’re lucky, stock market trading can see a 5% return over the course of one day, and oftentimes even more for the shrewd investor.

  • Acquisition of Assets

Unlike taking risks on index movements, trading on the stock markets sees the acquisition of real, valuable assets in the form of the bought shares. Unless something goes terribly wrong with the underlying business, any shares you acquire will keep some value that can be extracted at a later stage, making it a more secure investment with life-long value locked in.

  • Dividend Yield

Because shares allow the bearer to an annual dividend payment on a per share basis, they also yield an ongoing revenue stream in the good times.

  • Liquidity

Shares traded in the market have greater liquidity than other types of securities, which mean you can easily convert shares into cash by selling them to other traders in the market. This has made shares a more attractive investment vehicle for many investors.

Disadvantages

  • Risk

The key corresponding disadvantage of stock market trading, one wrong move can cost your entire capital amount and beyond, depending on whether or not your positions are leveraged. Managing risk as one of the key threats to your trading is a vital component of any effective trading strategy, and understanding from the off that markets can move heavily against you rapidly is crucial to success.

See Also: Risks in Stock Investment (Part 1)

  • Knowledge

When you’re trading the markets, you’re effectively competing with the savvy, resources and intuition of professional traders and real experts. Thus, it is critical that you develop the knowledge necessary to execute effective trades and interpret the way in which the markets are likely to move, which requires hard work, effort and a great deal of trial and error when you first start out.

  • Unpredictability

Markets aren’t always easy to read, and even the most experienced traders can get it horribly wrong. By their very nature markets are unpredictable, and can completely turn in an instant otherwise, every single trader would be a multi-millionaire.

See Also: Market Risk and Its Types

  • Losses

Investors can face huge losses if the value of the shares drops dramatically. Many factors can influence the prices of shares, such as natural disaster, negative rumors, profit downgrade, can lead to a fall in share prices.

See Also: Strategies to Help You Limit Losses in Stock Investing

Also read: Does Doing the Math Guarantee Success in Stock Trading?

If you want to learn new things and learn strategies about the market, BWorldpedia is the site you should visit! We provide profound and useful insights about the market and across a plethora of topics related to it.

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