The stock market provides many ways to invest in its activity. Retirement accounts control the investing process for you, while individual stock accounts offer greater control. These accounts contrast with other forms of investing, such as bank savings accounts, bonds and certificates of deposit. An individual stock account has its pros and cons when compared to other avenues for placing your investment capital.
Uncertainty
Many forms of investment carry stable and consistent interest rate returns. The stock market, by comparison, is unpredictable and offers no guarantees. This is both a pro and a con. With the increased risk comes a greater potential for reward. A stock holding can multiply many times over in some cases, but it could also perform poorly and result in a total loss of investment capital in some situations. For this reason, an individual stock market account may not satisfy your expectations for investment. Many investors diversify by placing only a fraction of their total capital into high-risk investments such as the stock market. This allows investors to limit their potential losses while gaining exposure to potentially great rewards.
Maintenance
Unlike a cash-based savings vehicle, an individual stock account requires frequent hands-on maintenance. As stocks performs well, smart investors start to sell portions of their holdings to realize some of these gains. By keeping the extra shares, they remain exposed to even further gains. Should the market reverse, they must sell their remaining shares before losses counteract any gains already executed. Losing positions also require the discipline to cut losses short and move on, rather than hold on hoping for a bounce while the investment only loses more of your capital. These decisions are stressful and time-consuming. This is a notable con for investors with little stock market experience or those who do not have the proper temperament to weather volatility. However, experienced investors may consider this control to be the most important advantage to having an individual stock account. An alternative is to employ a "full service" broker to handle all maintenance for you. But these services incur much higher commission rates and management fees.
Inflation
A predictable interest rate return on a cash account may seem effective and easy, but long-term investments frequently lose value when compared to increases in inflation. While the actual cash value may increase, the value of that cash could significantly decrease over the same period of time, resulting in a net loss for the investment. An individual stock account, by contrast, allows you to invest in corporations where stock prices usually rise alongside inflation. There are few investments that offer the long-term potential of even a modest stock market portfolio. For those seeking returns over the course of decades, an individual stock account is historically the best choice. However short-term fluctuations may still perform more poorly than cash-based investments.
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