Advantages and Disadvantages of Trading Stocks

Stocks provide higher return potential than most other asset classes. They provide wealth creation for individuals and institutions. Because they provide higher returns they also provide higher potential risks.

The greatest advantage of stocks is that they are liquid. They provide companies a way to access and raise capital. They can be easily issued and purchased. They can also be sold to generate cash. Stocks are transferable. Because they have value they can also be used as collateral. Stocks allow individuals to share in the growth of large institutions.

Shares of most stock represent a fraction of the total capitalization of a company making them available to most investors. Options are stock derivatives that are priced at a fraction of the share price. Derivatives allow individuals to invest in and control more expensive stocks. Options can also be used as insurance to hedge risk.

The greatest disadvantage to stocks is that they can lose value. They are not insured like bank deposits. Stock holders must be aware of the potential risk of losing money. Stocks are bought and sold on exchanges. Due to the trading of stocks, prices are affected by factors outside of company value. The ability for share price to change quickly makes stocks more difficult to manage then some other types of assets. Stock investing requires the investor to learn stock and option strategies.