The stock market is an open market where public investors buy and sell shares of publicly traded companies. Stockholders might share a part of the profit when the company is profitable. By the same token, stockholders share the loss when the company loses money. Through the New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ) in the United States, the buyer and seller can trade stocks of a company at a negotiated price. Before you invest in the stock market, you should be aware of the pros and cons.
Rate of Return
Investing in the stock market appeals to investors who want to take a chance that they can make more money in the market than they can from depositing their money in a bank. Investors obtain a return on principal from selling a stock that has appreciated in value, known as capital gain. You can also be paid dividends when a company decides to distribute a portion of its profits to stockholders.
Risk
Unlike certificates of deposit that guarantee a rate of return, stock market investments come with significant uncertainties. When a stock declines in value, investors lose the principal that was invested. The U.S. Federal Deposit Insurance Corporation (FDIC) insures bank deposits but not stock or bond investments. Stock market investment is "not a spectator sport," warns the Securities and Exchange Commission. Do careful research before you commit to investing in stocks. You might be able to ride out a stock value decline if you plan to invest your money for the long term.
Diversification
Composed of aggregates of stocks, mutual funds and stock index funds make it easy for investors to spread their risks over many companies in varying industries. Investors can also diversify portfolios by allocating investments in a combination of items such as stocks, bonds, certificates of deposit and gold.
Criticism
As the primary overseer and regulator of the U.S. stock market, the SEC strives "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation," according to the SEC's website. The SEC came under strong criticism in the wake of the 2008-2009 financial meltdown for its failure to protect investors. Public confidence in the stock market was severely shaken when some of the major financial institutions collapsed and large Ponzi schemes operated by stockbrokers and investment advisers were exposed.
Economic Growth
When companies sell stocks in the open market, they raise capital. Companies use the money to finance operations, undergo expansion and take on new ventures. These business activities create new jobs, advance our standard of living and fuel overall economic growth.
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