If you are interested in business or want to start in the world of investment, you have probably wondered on more than one occasion what are the advantages and disadvantages of investing in shares of a company . If so, keep reading, because in this article we will explain them in detail.
But before talking about the advantages and disadvantages of investing in stocks, you should be clear about what a stock is. The shares are securities of the value of one of the equal parts into which the capital of a company is divided. Acquiring them allows you to participate in the company’s shareholders’ meeting and enjoy its benefits.
In other words, shares can be defined as the parts that result from proportionally dividing the total ownership of the company in which you want to invest. So, for example, if you buy 5,000 shares of a company that has issued a total of 50,000 shares, you will own 10% of the company .
The profitability of the shares depends on the fluctuations of the stock market of the market . For this reason, it is important that before making the decision to invest in them, you carefully evaluate the advantages and disadvantages of doing so, so that the consequences do not catch you off guard.
Advantages of investing in shares of a company
Now that you understand what stocks are, let’s begin to break down what are the advantages of investing in the stocks of a company. We can summarize these in four main points , which we will explain briefly in this section:
- Investing in stocks gives you the potential to earn much more money compared to other types of investment, such as fixed rate bonds. It could even be said that it is one of the best options to invest your money and multiply it. Keep in mind that this applies, above all, in the long term.
- Unlike other forms of investment, the losses you may experience are limited only to your initial investment . This does not happen, for example, if you invest in real estate, because in that case you can end up with a debt much greater than your first investment.
- They represent a highly liquid asset , as shares can be sold on the market at their fair price according to fluctuations in the market, and converted into cash relatively quickly at any time. If you are not familiar with the term liquidity in the context of finance , we invite you to do a little review on this topic.
- You don’t need a very large investment to start, and you will receive profit periodically without any additional effort.
Disadvantages of investing in shares of a company
Although, as you saw in the previous section, there are multiple benefits that you can acquire by investing in shares of a company, there are also risks and disadvantages . In this section we will show you some of the most obvious and annoying disadvantages that you should take into account before making an investment.
- The first risk you should bear in mind is that the value of the shares will fluctuate according to the management of the company and according to the state of the economy. This volatility implies that at any time the value of the shares you acquired can significantly decrease. This could eventually lead to losses.
- Financial entities usually charge for the custody or maintenance of long-term shares , so you will have to consider that expense. Additionally, as they do not have a maturity period, the only way to undo the investment is by selling the shares.
- There is a limited amount of information about stocks and their value that comes from sources outside the company as such, making it difficult to make a well-informed decision.
As you can see, if you really want to invest, you should consider whether acquiring the shares is really appropriate or whether it will give you benefits according to the risk profile of that particular moment. Additionally, keep in mind that making an economic investment is not the same as a financial investment and you must know their differences.
We hope that this article on the advantages and disadvantages of investing in shares of a company has been useful to you. Do not forget to share it if you liked it.
