Share trading evokes one of two responses – excitement or resentment. There are people who make a living out of it whereas. on the other hand, some people keep themselves far from the stock market. In this article, we will explore the key advantages and disadvantages of share trading. The readers may make an objective decision about their level of comfort with the activity. They should not avoid the segment completely, but at the same time, not be careless with their investments. One can learn from various resources how to start share trading.
Advantages of share trading
High potential returns –
Equities as an asset class have a very high return potential. We have seen by how the S&P BSE Sensex has moved over the years. It was launched at a base price of 100 in January 1986 and crossed the 1,000-mark in July 1990. It breached the 10,000 barriers in a little under 16 years after that and less than two years later, crossed the 20,000 level. In January 2021, it went past the 50,000 level. The stock index comprises of equity shares of companies, changes in whose prices determine its level. This shows how much shares comprising the index would have moved in the aforementioned time.
Liquidity –
While there may be a few instances where certain asset classes like commodities and real estate may have done better than equities, the aspect of liquidity is unmatched for stocks. By liquidity, we mean the ability to buy and sell an asset at a point of time when it requires. The dematerialized holding of equities allows investors to trade shares in an instant, unlike property or bullion. High volumes of popular stocks make it easy to book profits at the push of a button.
Ownership –
Buying a stock means owning a portion of a company. For retail investors with a limited size of the investment, the ownership may be small, but each stock gives them the right to vote on some business decisions and changes in management. This aspect is missing in instruments like mutual funds and ETFs. A trading account helps you keep control of your holdings.
Disadvantages of share trading
High degree of risk –
Though share trading offers potentially high returns, it also comes with a high degree of risk. Each individual can have a different capacity of taking risks as well as different ways of reacting to it. While some may find high-risk enthralling, others may become overly anxious about it. Share trading is a risky activity and by no means can be categorized as safe. This is because of the amount of capital loss involved in it which means that in extreme circumstances, the invested capital itself may be lost without the possibility of recovery. Potential investors must be aware of the risk, but not afraid of it.
Volatility –
Volatility is represented by the degree of movement in the price of a stock. This movement can either be in an upwards or downwards direction. The larger the range of movement, the higher the volatility. This aspect is intertwined with share trading and is unlike fixed income instruments like bank fixed and recurring deposits where while investing itself, one knows the maturity value. Share prices can fluctuate widely and even if they are moving favorably, the fluctuation can be hard to stomach for some investors.
Research and due diligence required –
Investing in stocks requires some level of understanding of how stock prices work and the key drivers of a company or industry. To trade on shares, one must have a Demat and trading account. There are many stockbrokers who allow opening free Demat and trading accounts. Unlike funds, where one can rely on an experienced fund manager for making the right investment, share trading requires some skill on the investor’s part in order for him to profit from the activity. Acquiring this skill takes time, patience, and effort and it may not be feasible for all investors to do so.
Do not forget that share trading requires capital to invest and it will earn on your invested capital only which is not a regular income. Get all the information about it before investing your capital.
It’s not a paid-job where you get a considerable amount for your time and hard work. If you are new in share trading, during six hours of trading window operation, you may not be sure where the market is headed. So, your hard work will earn accordingly.
