Benefits And Risks Of Investing In Stocks

Benefits And Risks Of Investing In Stocks

Perhaps one of the most menacing detractions to investment portfolios is the advent of inflation.  However, a keen investor will be able to tell you that the best way to fortify your investment risks against inflation is to invest in stocks.  Since stock purchases represent partial ownership in a company you can expect a portion of your investments to grow or contract with the economy.

However, the latter point is significant because the economy is not always growing and sometimes sees periods of varying degrees of recession or decline, which means that your investment would be vulnerable to diminish in value.  Nonetheless, the government places a great deal of faith in the value of the stock market, broadly speaking.  As such, there are typically preferred taxation obligations for people who invest in stocks.

 

Benefits

Generate Growth

The ultimate ambition attached to the ownership of each stock portfolio is to grow said portfolio.  The most efficient path to achieve this type of prosperity is to own a plethora of stocks that span a wide variety of industries and countries.  In this context, it is important to remember that the largest companies will grow slower than smaller companies.  Additionally, in certain instances, dividends that are tied to the performance of the market can bring equity to perceived risk scenarios.  Buying small portions of a variety of stocks through mutual funds or indexed shares is often the most direct approach to minimizing risk.

Tax Benefits

Taxation is a legislative tool of the government to influence or encourage a specific type of behavior concerning public policy application.  To encourage investment in the stock market the government lowers the proportion of capital gains tax that you are responsible for when you profit from a stock investment as compared to other investments like bonds.  Additionally, if you are having a poor investment year and the market has influenced your stock to decrease in value you may have the option of selling and applying the aggregate loss against your capital gains tax responsibility for the year.  Even in an instance of no gains there are sometimes options to utilize realized capital losses against taxation.

Steady Growth

As previously mentioned, there are a few important ways to attempt to achieve steady growth.  You must be willing to diversify your portfolio so that not all of your investments are tied to a similar fate.  Additionally, it is crucial to remember that while smaller companies will grow at a faster rate, they pose a great deal of risk.  Conversely, larger companies tend to grow at a slow and steady pace.

Risks

Market Risk

There are three main types of risk that are important to understand.  Market risk exists when there is the possibility that prospective competitors or shareholders are willing to pay less for ownership of a stock than you have offered.  The best way to protect against this type of risk is to try to own stocks that perform in a variety of markets instead of just the United States of America.

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Company Risk

This type of risk occurs when an unfortunate and unforeseen event takes places with an existing company that dissipates the value of the stock in which you have ownership.  The best way to prevent this from occurring is simply to diversify the industries and companies in which you are purchasing ownership.

Industry Risk

This risk is similar to company risks concerning the ability of an unforeseen event(s) impacting an entire industry, which subsequently devalues your stock ownership.  Once again, the best way to protect your investments against this risk is to diversify your portfolio with a number of different industries.

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