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Advantages versus Disadvantages of Investing in Stock Market

Advantages versus Disadvantages of Investing in Stock Market

The stock market is like a weighing machine over the long run where it provides a platform to discover the price of a stock and then trade the stock at that price. Above all, the stock markets provide a very safe, secure and foolproof mechanism for purchase and sale of securities in such a way that the interests of all the parties to a transaction are protected adequately.

Investing in Stock Market for Wealth Creation

You may hear a lot and read a lot about how markets are volatile and constantly fluctuating. That is correct. However, the stock market is also the place where great fortunes are made and even an investor with limited means can actually create wealth for his / her family. The basic rule of equity investing is that you need to focus more on time and less on timing the market. Look at how stocks like Wipro, Havells, Eicher and Britannia created wealth over a longer period of time. They are the multi bagger and they are found only in the stock market.

Advantages of Investing in the Stock Market

Participate in the growth
The first advantage of investing in the stock markets is that it allows you to participate in the growth of the company. When you buy bonds or debentures, you just get a fixed interest and the redemption proceeds. When you buy equities, your returns will go up sharply along with the performance of the company and that is how equities create wealth.

Create and built wealth over longer period of time
Bonds don’t create wealth because you get a fixed return each year and that is all. Whereas if you had invested Rs. 10,000 in Wipro in 1980 it would be worth Rs.600 crores today. You cannot imagine that kind of wealth in other asset classes. Even stocks like Eicher, Escorts, TVS Motors, Ajanta Pharma, Symphony, Britannia have all been multi baggers in the last few years.

Very liquid form of investment
At one point of time it used to take a long time to sell your shares and get your funds out of the market. That is not the case any longer. If you sell you shares today, then you can get the funds into your bank account by T+2 date. Most of the large and mid cap stocks can be entered and exited without impacting the price in a big way which makes them extremely liquid.

Stock markets ensure a safe mechanism
Stock exchanges and SEBI have made the stock markets a very safe place. Demat ensures that you don’t have problems like bad delivery, fake shares and duplicate shares. On the exchange, each trade has the counter guarantee of the clearing corporation so you do not have to worry about other parties defaulting since the clearing corporation is the counterparty. Also trades on the exchange are standardized which ensures adequate liquidity.

Buying, selling and holding stocks is very simple
With the advent of online trading and online demat the entire process of participating in the stock markets has become a lot simpler. You can place buy and sell orders sitting in the comfort of your home. You can also give an online debit instruction slip (DIS) to confirm your transaction and to debit your DP account. The DP debit happens on T+1 day in case of sale and credit comes on T+2 day when it comes to purchase. Even the cash proceeds of the sale come into your bank account latest by the end of Day 2 from the date of trade.

Challenges of Investing in the Stock Market

Just as stock market investing has many advantages, it has a few challenges too. Of course, these challenges are not too big and can be overcome with a little effort. What are they?

Risk and volatility can be a big risk
Equity markets typically tend to overreact to news and numbers. You may be holding a stock and you may find the stock falling by 10% in a single day. This can be disconcerting in the short term but in the long run such volatility tends to get evened out.

Absence of information on most companies
This is a genuine challenge in the equity markets. While adequate information is available in the top 400-500 companies, if you go beyond that list, it is hard to get information. Normally, such stocks are not tracked by analysts and they also don’t disclose too much information.

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