Buying and selling stocks is one of the most popular ways to build wealth. It takes very little capital to purchase shares of a mutual fund or ETF and create a relatively diversified portfolio. Best practices encourage starting early and making regular contributions. In return, you could achieve enough gains to pay for your retirement.
The reality is less stable, with account balances rising and falling daily. Living through one or more crashes can take an emotional toll when you watch your earnings fall by 50% or more. Even though you don’t automatically lock in those declines, it can take years to recoup “paper” losses, serving as a painful reminder that stock investing involves both benefits and drawbacks.
Pros of Stock Investing
Easy to start: Most investors start with mutual funds, index funds, or ETFs. These funds invest in a group of companies based on size or industry and can create a relatively diversified portfolio and reduce overall risk. Over time, you may add individual stocks and bonds to expand your portfolio.
Stock market trends upward: Most portfolios appreciate. However, you may have to hold the position longer than expected to recoup paper losses in the event of a down market.
Flexibility: You can purchase individual stocks or funds that invest in hundreds of companies. Stock market investments allow you to gain part ownership across all major industries and in large, mid, and small-cap companies. You can also add funds in specific sectors as well as international businesses based on your risk tolerance and long-term goals.
Liquidity: You can buy or sell your position anytime the stock exchange is open. You generally receive funds within a week of the trade, making stocks highly liquid.
Could pay dividends: Payouts are part of some companies’ profit structure. You receive dividends as a percentage of the initial investment and can become a source of income. However, they are never guaranteed.
You gain ownership in the company: As a part owner, you share in the profits. The better the company performs, the higher the stock price goes. You also have voting rights, although in most cases, only major stakeholders have enough influence to alter company decisions.
Cons of Stock Investing
No control over company performance: Stock market investments are passive. You buy shares, and your investment grows if the company does well. If not, it could result in financial losses.
Limited access to proprietary company information: Professional and institutional investors have access to more information than the general public, which often means individuals buy at elevated prices and do not recognize warnings of an impending decline.
High volatility: The stock market rises and falls due to world, national, or company events. The stock price also reacts to non-financial factors like customer sentiment, interest rate changes, or anticipation of an adverse event like a recession.
Limited control over tax strategies: Fund managers buy and sell positions based on the goals in the prospectus, industry trends, and company data. In most cases, they do not consider the transaction’s tax consequences.
You could lose 100% of your investment: Stock owners share in both profits and losses, which could mean losing your money if the corporation goes out of business.
Stocks provide an easy way to invest, and most become profitable over time. The downside is that you must accept high levels of volatility, and you could lose money if you need to sell in a down market. Commercial real estate syndications could provide the solution if you want investments that produce market-rate returns without significant volatility.
To learn more about investing in real estate syndications with McKee Capital Group, watch our introductory video.