What are the Advantages and Disadvantages of Common Stock?
Common stock refers to the shares of a company, which in turn represent a small portion of the company equity which provides proportional ownership of the company. The first shares were issued at the start of the 18th Century by the Dutch East India Trading company and since then, many thousands of companies round the world have followed that route to raise money from open market by selling small pieces of equity. Investing in shares used to be a game for the rich and famous in early years and till recently, very few common people had the actual interest or ability to indulge in such investments. Things have changed in past few years especially since the advent of mutual fund equity investments. In the following sections we will discuss the advantages and disadvantages of mutual funds and how this affects the choice of mutual fund companies.
Benefits of Common Stock
The following are the benefits of common stock investments:
- Common stock is market-linked hence the potential of making gains and growing your money rapidly is very high. For example the New Energy and Natural Resources fund from DSP BlackRock Mutual Fund AMC has witnessed a year on year growth exceeding 64% in the past year driven by favorable market conditions.
- The extent of loss possible in case of an investment is limited only to the principal amount investment and this hold true for equity mutual fund investments as well. This is considerably better than some of the other leveraged investment options available to investors.
- Passive stockholders such as those investing through a DSP BlackRock Mutual Fund managed investment ensures that only a limited liability is exerted on them. This measure of protection helps make equities a popular investment choice.
- High levels of liquidity ensure that diversification and churn is easy to maintain in case of market volatility. A similar benefit is also available in case of open ended funds such the DSP BlackRock Mutual Fund AMC’s Opportunities Fund.
- An investor can gain from a mutual fund in 2 ways – dividends and capital gains. Dividends that are declared from time to time are effectively a form of profit distribution among shareholders. Capital gains on the other hand represent an increase in share prices over time as a result of good company performance.
Limitations of Common Stock
The following are the key limitations of the common stock investments:
- Being market linked they are prone to a high degree of volatility, which can lead to investment valuations changing rapidly, which might panic investors. This disadvantage is mostly removed in case of mutual fund investments as a highly diversified fund is less prone to such volatility.
- Stock trading requires the investor to make a deep study of the company he/she is investing in, which requires lots of time and effort. Alternately, DSP BlackRock Mutual Fund AMC’s investment options are professionally managed. Thus it requires less effort on the part of the investor to turn a profit.
- Common stock represents business ownership thus it implies that stockholders would be the last to get paid, just like other company owners. This can significantly decrease the payout as the priority of the company would be to pay taxes, facilities costs, creditors, suppliers and employees.
- May experts point to the fact that marketplaces such as stock markets tend to behave very erratically and irrationally. This is not just representative of volatility but can also be very frustrating to the investor. Fortunately mutual fund investments such as those made through DSP BlackRock Mutual Fund are less affected by such irrationality as they are a lot more diversified as compared to individual common stock investment.
|