What are the pros and cons of buying shares?
The stock market can be your best friend when prices are rising and your worst enemy when they’re falling.
If you invest wisely, you can make a lot of money through capital gains and dividends payouts.
But if you pick the wrong stocks, or invest at the wrong time, your losses can be just as large.
Depending on circumstances, share trading can also help do anything from helping your tax position to causing you terrible stress.
To help you decide whether to play the market, let us take you through the five pros and five cons of buying shares.
Pro #1: Capital gains
If you invest wisely, your stocks may significantly increase in value. That’s why some people regard the stock market as the best way to build wealth.
Con #1: Capital losses
Any investment is a gamble. That means you can lose money – even all your money. No matter how safe a stock looks, the price could go backwards and the company could even collapse.
Pro #2: Hello dividends
The best stocks not only rise in value, but also make regular earnings payouts, known as dividends. It’s a bit like a quality investment property that both makes capital gains and provides rental income. If your dividends are ‘franked’, you will also receive a tax credit that will probably allow you to minimise your tax – as explained in this article.
Con #2: Goodbye dividends
Dividends aren’t set in stone. So just because a particular stock has always paid a good dividend, doesn’t mean it always will. Dividends can go down – or even be eliminated.
Pro #3: Winning when you’re losing
Speaking of tax advantages, if you borrow money to invest in shares and your dividends are less than your interest payments, you will probably be able to use this loss to minimise your tax.
Con #3: Losing when you’re losing
Losing money may help you at tax time, but it will hardly improve your mood the rest of the time. Investing in the stock market can be an emotional roller-coaster, with prices going up and down and up and down, sometimes for no discernible reason. That can be very stressful.
Pro #4: Lots of choice
Whatever your flavour, you can find it on the ASX (Australian Securities Exchange). You can back small Aussie businesses or big multinationals. You can choose exciting start-ups or established companies. You can invest in banks, miners, telecoms, retailers, media firms, energy providers, software companies or a range of other types of business.
Con #4: Too much choice
Some people love the fact that there are so many different types of companies in which to invest. Other people, though, find this overwhelming. After all, with so many different options, how can you possibly know which one to choose?
Pro #5: Easy to transact
There will always be fierce debate about whether shares or property make the better investment. But one thing that nobody can deny is that it’s much easier to buy and sell stocks than to buy and sell real estate. If you see a stock that you like, you can quickly buy it. If you need some fast cash, you can quickly sell the stock.
Con #5: Costly to transact
Stock trading may be quick and easy, but it’s not free. You need to pay a fee every time you buy and sell.
This article is over two years old, last updated on October 6, 2017. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent investment funds articles.