An investor can start investing in shares even with a small amount of money and due to the advancements in the online share trading platforms where share trading has become more comfortable and simpler to understand. However, like any other financial security, the shares also contain some risks and benefits as there is always a possibility of losing money with the declining share value or vice versa.
- Capital Loss: Investing in the Stock market involves risk of capital loss as it does not guarantee the return. When the company post a bad result, or due to any reason the price of the stock fell. Then the investor does not get the value of the investment and will lead to the capital loss.
- Volatility Risk: In the share market, the stock prices fluctuate depending on the demand and supply. Therefore, prices of stock can rise and fall rapidly. While investing in the stock market the investor needs to be aware that the value of the shares may fluctuate substantially. This is called volatility.
- Timing Risk: Generally, it is observed that the stock market or a particular sector tend to follow cycles. Often after sharp rises in prices of stock either from a sector, some shares fall subsequently. The stocks whose prices have fallen may take time to recover. Different types of industries or companies may have different price cycles. Though past performance of any company or sector is not an indicator of future performance for share prices, however, it is essential to understand the past price cycles of a company to be cautious before investing.
- Dividend Risk: Declaration of dividend and the amount of dividend paid to the investor is the decision of the company. Therefore, it is not compulsory for companies to pay dividends to investors. Further, dividends vary greatly from company to company and year to year. Some companies that are currently paying dividends may not declare a dividend for a year or going forward.
- Currency Risk: This risk evolves when investors go for overseas investments or invest in companies that have offshore operations. The adverse moves in the exchange rate can reduce the value of the investment.
- Capital Growth: Capital growth occurs when the value of the investments in the stock market grows. Many people invest in shares for capital growth and to enhance their wealth, as well as protect themselves against inflation. This happens when people invested in stocks of company rise.
- Dividend Income: A dividend is paid to the shareholders out of the company's net profit, which is declared by the companyâs management. Generally, the investors who want a regular stream of income invest in stocks with higher dividend yields. In Australian, the dividends provide more worth more than just the cash payment they receive as the company can also distribute franking credits for any company tax it has paid. The excess franking rebate can be used for the reduction of the tax payable on other sources of income. Further, dividend reinvestment plans (DRP) can multiply the capital growth effect of a share investment by the investor.
- Flexibility: The investor can decide how much to invest and in what sectors to invest. The investor can vary their investments from time to time.
- Financial Control and Ease of Buying & Selling: There is a low cost involved in buying and selling relatively small amounts and the investor has the control when to get back some cash, rebalance the portfolio or book a profit. It is easy to invest in shares and to sell shares when required. This does not involve any conveyancing cost, stamp duty or ongoing expenses. The investor can easily do everything over the internet, and brokerage fees are much lower than any property investments.
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