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Buying Stocks: Advantages And Disadvantages

When and why you should buy stocks

Stocks are among the best long-term investments for most Americans. The stock market offers a vary stable and reliable method of building wealth long-term. This means stocks can potentially be top performers as a part of your overall financial plan.

Advantages of investing in stocks:

  • Stocks typically outperform all other investment options over any ten year period, making them a must for your long-term portfolio. Many fortunes have been made simply by purchasing a few high quality stocks and holding them for several years.
  • High quality stocks often "split" when the price reaches a certain level. This means that each share is divided up into one or more new shares and the price is divided along with it. 

    For example, if one of your stocks undergoes a 2 for 1 stock split, you'll end up with 2 shares for every one that you held previously.

    Of course the price of each new share will now be 1/2 of what is was before, but lower priced stocks tend to grow faster than higher priced stocks giving you a better chance of increasing your equity over time.
  • Except for a few short periods, stocks have consistently outpaced the rate of inflation since World War II. Inflation goes up and down, but stocks tend to continue to rise over time.
  • When you buy stocks, you take partial ownership of the company in proportion to the number of shares of each stock purchased. As an owner, you have an excellent opportunity to share in the financial success and growth of the company.
  • Stocks are excellent vehicles for retirement plans, especially those of younger workers who have quite a few years left to work. You should concentrate on buying stocks primarily when you're in your younger and middle working years.

Disadvantages of stocks:

  • Stocks are volatile. A single stock's share price can vary widely from day to day, month to month, and year to year depending on numerous factors that are beyond your control.

    The most effective way to invest in stocks is to "buy and hold" for the long-term and "diversify" (divide your stock holdings among several different stocks in various market sectors).
  • The closer you get to retirement age, the more risks you assume with stocks, therefore stocks are best used in the early and middle stages of your career.

    Since stocks are so volatile short-term, as you begin to reach retirement age, you should start gradually moving part of your assets into other sectors.
  • Companies can and do go out of business, at which time their stock usually becomes worthless. But if you select your stocks carefully you can greatly minimize this risk.
  • Both buying and selling stocks cost you money in the form of brokerage commissions, so the best strategy for investing in stocks is to "buy and hold" for the long-term.

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