Compared to traditional investments such as buying a home or setting up a business, there are others such as investing in the stock market that can also be very beneficial.
Investing in equities, that is, in the stock market, is one of the most profitable long-term savings methods, but what are the advantages and disadvantages of this form of investment?
Advantages
Asset diversification
Having access to all the financial products in the world with just one click is one of the greatest advantages of investing in the stock market. We can not only invest in companies but we can also invest in commodities that include products such as gold, wheat, crude oil, etc. To invest we need some tools. You can get one of them now. Just click here!
Diversifying is a normal practice in your professional and personal life. For example, you want to keep your options open in your career plan and you decide to learn how all areas of a company operate or study for a postgraduate degree. You prefer to diversify your collection of blazers in your wardrobe, so you have options to wear with a skirt or pants, with a dress or with jeans for a business casual Friday.
In that diversification, you surely have your spoiled ones that you will never change, and that’s fine. Diversifying opens the space for new alternatives, but it also allows you to keep the option that you perceive as ‘safe’ and gives you combinations that you had not imagined. It’s the same with the practice of diversifying your equity investment portfolio.
Diversification is not a controversial concept, neither in life nor in investments. It is also not good to radicalize the concept, therefore, do not fall into a point of extreme diversification or total concentration in one or two financial instruments. Diversification is a tool that cushions the risk of an investment portfolio. If you have four blazers of different patterns and fabrics, you will have more options to build ideal outfits for each occasion than if you only have two.
In a portfolio you can diversify by assets or types of instruments, countries, sectors and currencies, among others. But always in moderation.
The benefits of diversifying a portfolio are:
- Mitigate the risk of investments. Spreading your wealth over several instruments allows you to offset losses from some assets with gains from others.
- Allows you to set multiple investment goals. You will be able to invest in instruments of various terms that facilitate the achievement of the profitability goal.
- You will have currency coverage. You will improve your yields and you will be able to cover yourself against the variation of exchange parities.
- Allows entry to small investors. If you have a discreet amount, you can diversify through mutual funds.
The profile of the diversifier
There are two types of investor when it comes to diversification: the obsessive diversifier and the risk ‘lover’. Neither one is good, both are extremists. It is best to find the middle ground. It’s like wanting to study 10 master’s degrees to further expand your chances of growing or, on the contrary, thinking that you can only be an administrator of a button company, and nothing more.
The former wants to control risk so much that he prefers to invest in many assets, as many as possible in order to atomize the ‘risk’. This is not possible. Studies by Standard & Poors (S&P) have shown that after a dozen assets, risk increases. The second is so risk-loving that he decides to invest only in two assets in order to obtain the highest possible return. As you can imagine, the risk is also potentiated.
The recommendation is to find a midpoint, which will be aligned with your investment strategy and your objectives. It is not only about diversifying, but about achieving your profitability goal in the term horizon that you have defined.
Low barriers to entry
We can start investing with small amounts of money. To invest in the stock market, the minimum amount to be disbursed is the value relative to the selected value, this means that if we buy shares, their price will be determined by their listed value and the expenses of the operation applied by the market.
investment liquidity
Another advantage of investing in the stock market is that at any time you can sell your shares and have your money immediately. It will be sold at the price at which your investment is trading at that time, either at a loss or a profit.
Accessible information
Nowadays and thanks to the internet you can access the information of any company in which you are interested in investing. In addition, with a reputable online broker you can access a history of the evolution of the markets and companies in recent years and the technical and fundamental analysis of each company, in which you will find a lot of information and very useful when taking your investment decisions.
Cost effectiveness
Stocks have proven to be one of the most profitable investment vehicles over long periods of time. In any case, you have to be clear that past returns never guarantee future returns, and that investing in the stock market always carries risks. Another way to profit from stocks is through dividends.
Dividends are part of the profits that a company obtains and that it delivers to its shareholders as a form of reward to the investor. However, they are not safe because they depend on the company obtaining results and deciding to distribute them among its shareholders. It is a decision that is normally made at the shareholders’ meeting.
Disadvantages
Although it is true that the stock market is usually linked to the concept of making money, in order to achieve profitability it will be essential to diversify risks, have a long-term time horizon -minimum of five to seven years-, and put yourself in the hands of qualified advisors.
The stock market is characterized by its unpredictable nature and its constant and volatile risk. Whoever is willing to win will have to be willing to lose. And it is that in the stock market there is no security either in the short or long term. In addition, before investing it is important that you know how the stock market works.
