Pros and cons of investing in shares

Oluwatoni Olujinmi

Investing in shares is one of the oldest and most prominent investment avenues for gaining significant profit. However, when it comes to investing in shares, there are a few things that you should know. 

First, shares are a form of ownership in a company, and they can provide you with a way to invest in a company’s future profits. Second, buying shares has its own fair share of risks, so make sure you understand the risks before you invest any money.

Here is a quick look at the pros and cons of investing in shares to assist you in making a decision.

Advantages of investing in shares

  • Flexibility of investment 

Investing in shares doesn’t demand a sizable upfront investment. It gives investors the flexibility of smaller investments. 

Moreover, an investor who wants to get started investing in shares can do so by buying shares in smaller units from small-cap or mid-cap corporations.

Also, shares investments provide the additional benefit of flexibility to purchase at your convenience; you are not required to make a certain monthly investment.

  •  High returns

With shares, investors have a much better chance of generating higher returns in comparably shorter amounts of time than with other investment products.  

Investing in a variety of shares will also enable investors to increase their wealth by capitalizing on profitable sector-specific growth.

  • Safety Against Inflation

The easiest method to stay ahead of inflation is to invest in shares. Over the years, inflation has generally hovered about 3% each year, while there have been times when it has been much higher or lower.

However, due to their ability to pay dividends, shares have an edge over other forms of investment. Dividends are sums of money that businesses pay their shareholders based on their profits.

Dividends are a significant component of investment returns due to the extra cash given yearly. 

  • Diversification

Shares provide diversification due to their independence from a single sector or corporation.

You can reduce your risk exposure and possibly shield yourself from losses if one business performs poorly. You can invest in a variety of shares types across several different industries, sectors, and geographic locations. 

  • Liquidity 

Shares and stocks are commonly described as liquid assets as a result of their ease of conversion into cash, which has several purchasers at any time.

However, it is much easier to look for buyers because the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) both have significant average daily transaction volumes. It indicates that a particular stock is receiving attention from several buyers and sellers.

Disadvantages of investing in shares

  • It takes time to appreciate

The incredible power of compound interest can only be unlocked with time as a major element. Estimating the length of time it will take for an investment to pay off is equally harder to predict. 

The shares prices could increase gradually. Some shares may experience a rapid rise Within days or weeks. Yet, some shares may remain constant for a considerable amount of time before beginning their development phase. 

  • Liquidity risk

Liquidity refers to how easily one can trade an asset for another. Despite being significant and logical, liquidity risk is underappreciated.

Investing in the shares carries a significant level of risk. The danger of losing money increases with bigger returns.

The fact is, there is a chance of suffering losses when a firm performs poorly or is below your expectations.

An investor may experience a complete loss of capital in unfavorable market conditions. As a result, it is recommended to invest cautiously.

To minimize liquidity risk, examine the bid-ask spread and daily trading volume for any share you wish to purchase. If you plan to hold illiquid investments, be sure your strategy has enough liquidity in other places to cover any future needs.

  • Cost

This is comparable to the possibility of missing out.

A significant amount of your money can be lost due to commissions and other expenses that are frequently associated with shares transactions.

However, you will run the danger of losing money if you don’t set yourself up for successful ethical investment growth.

  • You must regularly monitor your investment

If you decide to invest in shares, you need to keep track of them. This means checking the value of your investments, the performance of your investments and how much progress they are making. You also need to make sure that the investment strategy you use is working as expected.

Ensure you maintain a cash reserve outside of your investment portfolio so you may take advantage of unanticipated opportunities or expenses.

Investing in shares: is it worth it?

It’s a common misconception that investing in shares automatically leads to an increased financial gain. However, investing in shares comes with significant risks that you need to be aware of before moving into any investments. To optimize profits, it’s crucial to exercise patience and make long-term investments.

If you’re unsure about whether to invest in shares or not, then we recommend that you consult a professional financial advisor who can guide you through the process of selecting shares and other financial products for your needs.

Read also: 10 simple tips for saving money

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