Advantages and Disadvantages of Investing in Equities

Equities come with both rewards and risk. The main rewards are capital gains — that’s when the stocks you buy go up in price — as well as dividends. Dividends are cash payments the company makes to its shareholders, often on a regular schedule.

Pros and Cons of Stock Investing

*Stock indices are baskets of stocks based on specific criteria. Indices are created and tracked by companies. Instead of buying individual stocks, you can buy exchange traded funds (ETF) that track a stock index. Through buying just one ETF, you could own a piece of hundreds of companies. I’ll discuss ETFs in the next section.

A stock index ETF holding hundreds of stocks won’t likely drop much if one company in the index goes bankrupt. Conversely, the ETF also isn’t going to shoot higher if one stock does well.

For the average person, investing in exchange-traded funds is the better choice. It is lower risk than investing in individual stocks. You are unlikely to lose all your money, whereas if you put your money in a few stocks, and those stocks don’t do well, you could lose most of your money pretty easily.

Owning many stocks is called diversification. Risk is spread out over many stocks. Buying 30, 40, or 100 stocks individually takes a lot of time and will also likely generate a lot of commissions. Buying one stock index ETF means you instantly own a fraction of hundreds of companies with one transaction.

Ideally, invest in what are called large capitalization stock index ETFs. These include ETFs based on the S&P 500, the Nasdaq 100, or Dow Jones Industrial Index in the US. If outside the US, invest in a major index in your country, such as the Nifty 50 in India or the FTSE 100 in the UK, for example.

Many people also choose to invest in individual stocks. These methods require more research into which stocks to buy, and more time in learning how to implement the strategy. Such strategies include:

• Growth investing: Buying stocks that are expected to grow their earnings, and thus the stock price may increase as the company grows.
• Value investing: Buying stocks that are trading cheaply based on some metric such as earnings.
• Momentum investing: Buying stocks or ETFs which are being pushed higher by strong demand or interest in a product or service.
• Buy and hold investing: Buying stocks with strong fundamentals such as steadily growing earnings and sales, in-demand products, and a bright future outlook. Buy-and-hold stocks are often held for many years or even decades.
• Technical investing: Investing based on chart patterns or technical indicators based on the price fluctuations of a stock.

Let me preface by saying that investing in shares is a great choice. The S&P 500 stock index has a 100-year history of producing 10% yearly returns. That doesn’t mean the price goes up every year; it means that when up and down years are averaged, the result is a 10% return per year if holding the investment for decades.

That’s a great long-term return, especially considering how easy it is to buy (and later sell) an S&P 500 ETF, for example. All that is required is a brokerage account.

Bonds are another asset class that is generally less volatile than stocks but tend to produce lower returns, such as 5.59% per year. Real estate, and most importantly the land, is another asset to invest in. Farmland has generated an 11% yearly return.

To put that in perspective, even unopened sets of Lego increase in value at about 11% per year. Trading cards, like hockey and baseball cards, increase by about 12% per year. Art appreciates by 15% per year, and collectible comics can increase by 17% per year.

Some of these returns are higher than stocks, but remember that these aren’t liquid markets where you can easily buy and sell in seconds. You will need to buy or sell these items yourself, or with the help of an agent. It may include shipping, fees, and not being able to sell or buy when you want.

This is why investing in equities is so popular. It offers a great long-term return and is highly liquid, meaning you can buy and sell when you want and with minimal fees.

How to open an equities investing account?

Pick a stock broker, then click on the “Open Account” button on their website. You will need ID, often a utility bill, and information on your assets, trading information, and income.

You will answer a few simple questions, upload your documents and proof of address (utility bill) and your account will likely be approved within a couple of business days. You can then deposit funds to the account and start investing in assets.

Why are equities so risky?

Equities do have risk. They can go up and down. Not investing is also risky because keeping it in a savings account means it is losing its purchasing power to inflation. Buy an S&P 500 ETF, that way with one transaction you own a small piece of 500 large and profitable companies.

If that feels too risky, you could use some of your funds to buy a bond ETF which is less volatile. This reduces the risk of your investments compared to only being invested in stocks.

What is the best way to invest in equities?

You could buy individual stocks/companies if you are willing to learn investment strategies and spend time doing research. Alternatively, you could buy an ETF that tracks a major stock index like the S&P 500.

The S&P 500 has generated average yearly returns of 10% per year, and thus buying an S&P 500 ETF is the best way for most people to invest in the stock market.

Which asset class is safest to invest in?

Cash or money markets are considered the safest class because there is very little volatility. The returns are also lowest, though, which means you could lose purchasing power to inflation.

Bonds are another asset which is considered safer than buying shares, because the returns are less volatile. Equities provide a higher return and you can expect a lot of ups and downs in price. Cryptocurrencies are even more volatile and thus less safe.

What is the difference between equities and stocks?

Most of the time these terms are used interchangeably, along with shares. They all represent ownership in a company. Stocks usually refers to the assets traded on a stock exchange.

Shares or equities can refer to a stake in a company which isn’t even publicly traded. These shares or equity can still be bought and sold through private deals, but stocks is a term typically referring to shares or equities that trade on an exchange.

Final Thoughts on the Advantages and Disadvantages of Investing in Equities

Investing in equities is a great way to build wealth over the long-term. Major stock indices like the S&P 500 have outpaced inflation. Keeping money in a savings account may seem safe, but that money is losing purchasing power as interest rates are usually less than inflation.

For most people, investing in a stock index is the most efficient way to invest in stocks. You can buy individual stocks, but it takes time to research companies, and individual companies can go bankrupt. If you own an ETF that owns 500 companies, if one of them goes bankrupt your portfolio is barely affected.

While stocks are an easy investment to get into, you could also consider investing in real estate, land, or even collectables like comics or art. Learn the difference between trading and investing.