Stock market trading is wildly popular across the globe, with billions traded in company securities and assets across many millions of investors. For the businesses selling their securities, stock market trading provides a key mechanism for raising finance, while also giving life to pensions, savings funds and individual investment portfolios. But like any activity, stock market trading has both advantages and disadvantages that must be weighed up in determining whether it’s a worthwhile pursuit for the individual would-be investor.
Trading Advantages
Rate of Return
Perhaps the main advantage stock market trading brings to the table is its inherent ability to deliver significant rates of returns. Contrasted with an interest-bearing bank account which might pay 5% per annum if you’re lucky (without factoring in applicable taxes and the impact of inflation on the value of capital), stock market trading can see a 5% return over the course of one day, and oftentimes even more for the shrewd investor.
Acquisition of Assets
Unlike speculating on index movements, trading on the stock markets sees the acquisition of real, valuable assets in the form of the shares that are bought. Unless something goes disastrously wrong with the underlying business, any shares you acquire will retain some value that can be extracted at a later stage, making it a more secure investment with life-long value locked in.
Dividend Yield
Because shares entitle the bearer to an annual dividend payment on a per share basis, they also produce an ongoing revenue stream in the good times. Furthermore, the payment of dividends receives a more favourable tax treatment in the UK, with basic-rate tax paying recipients in effect paying 0% on the dividend revenue they receive.
Trading Disadvantages
Risk
The key corresponding disadvantage of stock market trading, one wrong move can cost your entire capital amount and beyond, depending on whether or not your positions are leveraged. Managing risk as one of the key threats to your trading is an essential component of any effective trading strategy, and understanding from the off that markets can move heavily against you in the blink of an eye is crucial to success.
Knowledge
When you’re trading the markets, you’re effectively competing with the know-how, resources and intuition of professional traders and real experts. It is critical therefore that you develop the knowledge necessary to execute effective trades and interpret the way in which the markets are likely to move, which requires hard work, effort and a great deal of trial and error when you first start out.
Unpredictability
Markets aren’t always easy to read, and even the most experienced traders can get it horribly wrong. By their very nature markets are unpredictable, and can completely turn in an instant – otherwise, every single trader would be a multi-millionaire.
Read more on advantages and disadvantages of share trading.
