The world of finance and financial markets is commonly ignored by those who work outside of industry, but due to excessive management and performance fees, as well as the increasingly low cost of executing trades has led to a change. Those outside the industry are now taking investment decisions into their own hands.
To help those people, the Horizon Institute has compiled a list of the key reasons for owning (and not owning) stocks and shares.
Key reasons for owning Shares:
- To beat inflation – with current account savings at an all-time low the stock market is one of the few markets left that offer inflation beating returns.
- Low maintenance – it is crucial to monitor your portfolio at regular intervals, but when compared with other types of investment, such as renting property, the amount of on-going effort is less significant.
- Globalised world – in the past share ownership was firmly rooted in investing in well-known UK companies, but this is now a thing of the past. Today you can access and purchase shares in over 100 countries as a UK citizen. This opens up new markets and opportunities irrespective of geographical location.
- Limited liability – the financial innovation of separating liability risk from ownership revolutionised the financial system. Today there is no risk of being held personally responsible for a public companies debts, which gives investors confidence in that they understand only the value of the shares can be lost.
- Very good liquidity – Due to the high volume of buyers and sellers in exchanges, it is possible to turn shares into cash within minutes while the financial exchange is open.
Key reasons for avoiding Shares:
- Level of risk – when compared to other safe assets, such as government bonds or cash deposits, the level of risk is an order of magnitude greater. This is compensated by the increased rewards, or profits to shareholders.
- Market volatility – The financial markets move in broad cycles, and crashes are semi-frequent events. This can pose a large risk to those who invest at the wrong time, as it can take decades for a portfolio bought at a peak before a crash to recover.
- Lack of Control – as a small shareholder in a public company, your individual influence on the management or running of the company is going to be non-existent.
- Knowledge – the financial markets are watched and analysed by some of the brightest minds in the country, and so the competition for making a profit is often very high.
- Fraudulent Stock Brokers and Educators – An entire market of fraudulent brokers and educators has emerged. Unsuspecting beginners often fall into the traps set out by brokers who have the “perfect profit-making system” or educators that tell you that “it’s easy to make $10,000 a month trading the live forex markets”.