Advantages & Disadvantages of Investing in the Share Market

Advantages and Disadvantages of Share Market Investing

There are plenty of investment options available today from shares, mutual funds to PPF, FDs/RDs etc but the investment option which has provided the highest returns in the long term are Shares. 

But high returns come with high risk. Hence before you invest your hard earned money in the share market, you should be aware of the advantages and disadvantages of share market investing

Typically, investors prefer to stay away from uncertainty and tend to panic when such situations arise. This panic then breeds mistakes and in a volatile market, mistakes can be easily translated to losses. Therefore, investors need to understand how to overcome the disadvantages of share market investing

Today, we will discuss the advantages and disadvantages of investing in the share market and how you can create wealth using the stock market. 

Advantages and disadvantages of investing in the share market

So, Let’s get started.

Advantages of Share Market Investment

  • Probability of high returns over the short-term

The biggest advantage of share market investment is that it has the potential to generate inflation-beating returns within a short period of time as compared to other investment avenues like bank FDs, saving accounts etc.

  • Ownership stake in the company.

When you buy shares of a public listed company, no matter how small your share size is, it gives you proportionate control over the company. This ownership of shares will in turn grant you the voting rights and you will receive dividends, bonus, etc. 

  • High liquidity 

Unlike other investment avenues, shares do not have any lock-in period. Investors can buy and sell shares through the stock exchanges within seconds.

  • Your rights are well protected by SEBI

The stock market is regulated by the Securities and Exchange Board of India (SEBI). SEBI strictly monitors market participants like brokers, sub-brokers, advisors and stock exchanges to safeguard the interest of the shareholders. 

  • Tax benefits
    • Long-term capital gains i.e. investments held for more than 12 months are taxed at 10% over Rs 1 Lakh only. 
    • Short-term capital gains i.e. investments held for less than 12 months are taxed at 15% + 3% cess.
    • Any capital loss can be offset or carried forward for up to eight financial years.

Disadvantages of Share Market Investment

  • Volatility

Investments in the share market are considered risky since the markets are volatile and shares can fluctuate and even hit lower circuits. 

  • Risk

Risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets. Risks are of two types:

    • Systematic risk 

Systematic risk tends to influence the overall market and it cannot be eliminated through diversification. 

Example: Natural calamities, political turmoil, terrorist attacks, etc.

    • Unsystematic risk

Unsystematic risk is unique to a specific industry or a company and it can be diversified.

  • Stockholders are paid last.

When a company is winded up, shareholders are the last one to get paid whereas bondholders and creditors of the company get paid first. 

  • Emotional Roller Coaster

The stock prices rise and fall frequently due to volatility. Many investors tend to buy a share at a high price out of greed and sell at a low price out of fear. Hence, coffee- can investing is the best strategy to avoid roller coaster investing.

How to make your share market investments less risky.

  • Diversify your investment to reduce your risk according to:

    • Investment types

You should diversify your stock portfolio by investing in bonds, commodities etc to create an overall well diversified portfolio. 

    • Different sectors

Your stock portfolio should include stocks from diversified sectors like Pharmaceutical, FMCG, Banks, IT, etc.

    • Through mutual funds and SIP’s

Mutual fund investments are considered less risky than investing in the share markets. It allows you to own hundreds of shares selected by an expert fund manager.

  • Follow a staggered investment strategy.

Remember, buy in a staggered manner when there is panic in the market and sell on euphoria. 

CONCLUSION:

Although there are several advantages of share market investment,  investors must be cautious while making investment decisions. Understanding the basics of the stock market and doing proper research before investing is advisable to mitigate risks and maximize returns.

To start your investment,  open a Demat account with Samco today and get access to a unique 3-in-1 Demat, Trading and Mutual Fund investing account.

Recommended reading: What is liquidity and volatility and how to use liquidity and volatility in share market trading?

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