About the Disadvantages of Investing in Stocks

The stock market is the place where the hopes and dreams of educated investors can come true. More often, it is the place where those same dreams are broken and investors' life savings are scattered to the wind, never to be seen again. Stocks are the foundation for the economies of the modern world, but there are many alternative ways to invest your money that don't involve the exposure and risk of directly investing into them.

  1. History

    • The stock market began as a simple means for people to use their money to purchase partial ownership in individual companies that they believed would be successful over time. Originally, this kind of investment would result in the creation and ownership of a stock certificate, which served as proof of ownership in the company, and the transaction was made in person by all interested parties and witnesses.

    Function

    • The purpose of buying partial ownership in a company is so that the investor can share in the company's profits as it becomes a larger and more valuable entity, thus increasing the value of the underlying investment. Single stock investing is the simplest and easiest way to purchase shares of ownership in a company, but the shares have no guarantee that they will hold their value over time; the moment shares of ownership are purchased, their value may rise or fall with the fate of their company.

    Considerations

    • There are many dangers to consider when investing in stocks. One of the most considerable risks involved is that the underlying company will fail and become bankrupt, causing the partial ownership through stocks to become instantly worthless. All businesses are subject to the standard laws of economics and the financial turmoil that is common to their industries.

    Considerations

    • Buying single stocks in individual companies can be the simplest, but also the riskiest, way to invest money for gain. While there are usually warning signs to indicate that a company is failing, there are also situations in which little to no warning signs are displayed before a company is suddenly forced out of business. This is the natural risk that is inherent to single stock investing.

    Prevention/Solution

    • One of the most popular methods for avoiding the common risks of stock investing is the diversification of an investment portfolio. Diversification can be obtained through spreading investments over a wide range of businesses and industries so that the likelihood of total loss is reduced. Although this can be done through simple stock investing, the amount of capital necessary to provide adequate investment diversification is often much too great for the average investor.

    Prevention/Solution

    • The most common solution for providing investment diversification is through mutual funds. Mutual funds are simply pre-determined groups of stocks that investors pay an expert or group of experts to monitor and invest their money into. The advantage of investing in mutual funds is that they provide diversification that is much easier to obtain through combining the strength of many investor's assets. In this way, the risk of investing in single stocks is greatly reduced, and the investor does not need a large amount of capital to obtain the diversification. The addition of an educated manager or group of managers to direct the fund also adds the benefit that investors do not have to spend a great deal of their own time monitoring their investments.

    Expert Insight

    • Investing of all kinds can be dangerous, but can also be very rewarding if done properly. The key to successful investing is to fully understand the workings of investments and to seek advice from those who have experience in investing. Financial experts may take money away from the amount to be invested, but the security they provide can easily make up for the loss. Be sure to do some research before selecting a financial expert for your own investments.

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  • Photo Credit Image Source: wikipedia.org

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