The Pros and Cons of Stock Market Investment

The stock market has proven to be a happy hunting ground over the years for many investors, with some creating substantial fortunes.

While some investors still bear the scars from the Global Financial Crisis, others perceive the stock market to be a gambling mecca, where fortunes are lost or made overnight.

First and foremost, when I speak about the stock market, I am referring to the blue-chip companies such as our big banks, mining companies like BHP Billiton and RIO Tinto and some of Australia’s largest organisations such as Telstra and Woolworths.

The smaller ‘speculative’ companies can be highly volatile and don’t fit the criteria for sound and reliable investment strategies.

The capital appreciation of a share is the obvious staple for making money in the stock market and how it works is very straight forward.

You buy a share and if it increases in value you will make money and if it falls in value you will lose money. Just like real-estate right?

This is correct when you are comparing the two types of investment on face value, but the advantage of the stock market is that there is an absolute value attached to your investment that is completely transparent. The truth is that property valuations can fluctuate just like shares, but because the true value at any given time is not so transparent, investors are generally more relaxed about price movements.

The Good

Shares in quality companies can provide great capital growth potential when purchased at good levels and can provide income returns through dividends.

Shares are easy to trade, transaction costs are low and only a small amount of money is required to invest to get started.

The great liquidity in the share market also means that you can dispose of your shares at market value on the ASX quickly and efficiently.

The Bad

The transparency of a share’s value, although an advantage is also a disadvantage because investors can follow the rise and fall in value by the minute if they choose, and coupled with the ease of disposal, investors can sometimes make rash decisions and forgo a sensible investment strategy based on emotion.