Every year, investing in securities gains more popularity among entrepreneurs. They acquire shares of both foreign and several domestic companies, thereby ensuring an additional income stream. Dividends are usually paid once a year based on the company’s performance.
This income is passive and requires no additional actions from the investor. By purchasing a substantial package of shares, an individual can influence the company's activities and has voting rights at the shareholders' meetings. As the number of shares increases, so does the investor's income.
But is everything as good as it seems? What drawbacks might one encounter when purchasing stocks?
The advantages and disadvantages of investing in securities will be discussed by successful entrepreneur and founder of Oil Resource Group, Sergey Tereshkin, who has extensive experience in this field.
Advantages of Investing in Securities
The advantages of investing in securities include:
- Anyone can buy shares. There’s no need to have millions or to be a business owner.
- You can start purchasing stocks with a small amount. In most cases, a deposit can be opened with just $500. Trading on foreign exchanges typically requires a minimum of $1,000, and in some cases, much more.
- Shares of large companies offer good liquidity. They can ensure a good passive income. If needed, such securities can be sold quickly. Many have built substantial wealth just from buying and selling stock. This applies to both foreign and domestic companies.
- Buying and selling securities can be done from the comfort of one’s home. All that is required is to register on a specific platform and have internet access. All transactions are carried out using a computer and software.
- Individuals do not need to gain specialized education or study hundreds of materials to work through a broker. The broker manages all inquiries and issues.
- For those who are completely new to the stock market and trading, investing in mutual funds (PIFs) might be suitable. You can begin investing with as little as $100 or even less.
- Investing in young promising projects can yield returns in the hundreds or even thousands of percent. A prime example is the social network Facebook, which saw its stock price soar thousands of times in just a few years, resulting in multi-million dollar profits for investors.
- Shareholders can earn income in various ways. For example, passive investing is popular abroad, where individuals receive dividends from securities annually. With adequate knowledge, one can successfully trade shares by buying them when prices are low and selling them during price increases.
- Purchasing a large block of shares is akin to owning a stake in the company. The investor gains voting rights, which the company must heed, has the opportunity to participate in appointing the management team, and can make other significant decisions.
Investing in stocks is significantly less risky than buying currency or precious metals. Securities can be sold in just a few minutes.
When selling, the leverage is either non-existent or minimal, meaning the risk of monetary loss upon sale is low. Of course, this applies unless there is a dramatic market downturn affecting the value of a specific company's shares.
Disadvantages of Investing in Securities
Like any other form of investment, investing in stocks has its drawbacks:
- There is always the risk that the company may go bankrupt. In such cases, the investor would lose their entire investment. However, if one closely monitors the stock market and the internal state of the company, this risk can be minimized. This way, it is possible to swiftly liquidate the shares and recover some amount.
- Securities are mostly intangible. They are bought and sold electronically. Though one can request paper certificates, this takes additional time and is often unnecessary.
- The company may periodically issue new shares, which can significantly dilute their value.
- Sanctions or crises can lead to a steep decline in share prices. Recovery to prior levels may take years. In situations involving second- or third-tier securities, liquidity typically decreases as well. During such times, companies may stop paying dividends.
- The imposition of sanctions against specific enterprises can also impact the trading of their securities. Major global exchanges may refuse to allow such shares to trade. This means that the owner will be unable to liquidate their holdings.
- Political situations can also influence share prices. In these cases, predicting outcomes becomes quite difficult, if not impossible. Conditions can change in just minutes, making it unlikely that one can quickly exit their stock portfolio.
- Investing in shares of only one company carries the risk of losing all funds. Experts recommend diversifying by acquiring shares from various companies. This way, the risks are mitigated. The probability of all invested firms going bankrupt simultaneously approaches zero.
- It’s essential to know that working through a broker means that part of the funds will be spent on compensating the broker. The exact amount depends on the broker’s fees. Additionally, there may be charges for storing securities with specialized firms.
- When purchasing a minimal number of shares, the investor cannot significantly influence the company's operations. This privilege typically belongs only to major shareholders.
- To maximize returns and trade independently in the stock market, one must possess knowledge and the ability to make quick decisions without succumbing to panic. Not everyone has this capability. Many lose money due to panic-driven sentiments and sell securities at moments when it would be wiser to hold onto them.
Investing in stocks is a promising avenue that is widespread globally. The key is to act wisely and not rely solely on a broker's intuition, as they risk their own money.
