Owning a common stock is to hold a piece of a big business.
For young investors, it is a way to be a part of a larger picture.
However, just like any investment, there are ups and downs
to common stock. How good or bad the situation is for you, depends on where you
are standing in the field that you are in. Consider these advantages and
disadvantages before making your investment decisions.
Pros
Ownership Equity
Equity ownership offers the highest return in the long run. Compared
to bonds, or certificates of deposits (CFDs), common stocks have provided over
6 percent real rate of return, giving one the best ways to be one step ahead of
inflation.
Limited Liability
This means your liability is only limited to the amount of
your investment. If you invest $1,000 in a company, then that is also the most you
are likely to lose. This is a good thing in the event that your investment
takes a turn for the worst and the business gets saddled with debt.
Liquidity
Common stocks are liquid. It can be sold anytime, or you can
purchase more if you want to raise your stocks. Common stocks can also be bought
at a reasonable cost.
Capital Appreciation/Growth
People invest in common stock for one reason, they want
to increase the value of their money. Investors in a common stock aim on
acquiring the stock at a lower cost to eventually sell it at a higher price.
Dividend Payments
Companies distribute a
part of their income to their investors in dividends when their earnings exceed
what they need to cover maintenance and growth. This distribution of earnings
provides profits for investors. Investors usually get dividends periodically.
High Potential Income
Common stocks offer a better chance to generate bigger
return on investment. Given that they are guaranteed, you can identify the
minimum and maximum amount you can accept to gain from them.
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