Stocks are typically a valuable part of an investment portfolio. This is because owning stocks in various companies can help a trader build their savings, hedge against inflation, and potentially gain some regular income through their investments. Below, we take a look at some benefits of trading shares, and why people usually do so.
What is stocks trading?
Stocks trading otherwise known as equity trading or stock trading, involves the buying and selling of stocks in a publicly listed company. The goal is to potentially take advantage of price fluctuations happening in the financial markets. Trading shares can be done by individual retail investors, institutional investors, and other traders who are looking to capitalise on short-term price movements.
Types of shares
Common stocks
Common stocks represent shares of ownership in a company, they are usually the type of stock that most people trade or invest in. A great majority of stocks are issued in this form. Unlike preferred stocks, they also confer voting rights. This means investors are allowed one vote per share owned, so they can elect board members and oversee decisions that are made by management.
Common stocks also tend to outperform bonds and preferred shares. This is the type of stock that usually has the largest potential when it comes to long-term gains.
That said, when it comes to dividend payments if a company misses those, common shareholders are bumped back – behind preferred shareholders. During times of insolvency, common stockholders are last in line for a company’s earnings and assets. This means when a company liquidates and pays all bondholders and creditors, common shareholders will not receive anything until preferred shareholders are paid. This makes common stocks a lot riskier when compared to preferred stocks.
Preferred stocks
Preferred stocks do not come with any voting rights. So, when it comes time for a company to elect a new board of directors or vote on some kind of corporate policy, preferred shareholders have no say. Preferred stocks generally function similarly to bonds, as investors are typically guaranteed a fixed dividend.
Additionally, when a company is liquidated, preferred stockholders usually have a greater claim to the company’s earnings and assets. The dividends given are also higher than those issued for common stocks. Preferred stockholders also get priority over common stockholders. This means if a company misses a dividend payment, it must first pay preferred stockholders before common stockholders.
The benefits of share trading
Trading shares can offer traders various advantages, especially for those who are looking to potentially grow their wealth and participate in the financial markets. Below are a few key benefits when it comes to share trading.
Stay ahead of inflation
Historically, stocks have typically yielded generous annual returns over the long term. This typically is better than the average annualised inflation rate. This means that traders can potentially stay ahead of inflation. Additionally, this also means that traders can buy and hold their securities even if their value temporarily drops in the short term.
Comparatively easy to buy
On the whole, the stock market makes it easy for traders to buy shares from companies. Traders can simply buy these stocks through a brokerage firm, or financial planner, or do so online. Once a trader has set up a trading account, they can easily buy stocks in a few minutes, making share trading incredibly convenient.
Financial control
The flexibility and liquidity of shares are key advantages when it comes to buying them. More specifically, the ease and low cost involved when it comes to purchasing and selling relatively small amounts of stock can give immense financial control to traders. This can come in the form of freeing up some cash, rebalancing a portfolio, or simply realising a potential opportunity.
Transparency and information availability
Publicly traded companies are often required to disclose certain financial information and reports regularly. This offers investors access to data for informed decision-making.
Shares for dividend income
Some companies distribute a portion of their profits as dividends to shareholders. These dividends can help provide a steady stream of income. This, in turn, makes share trading more appealing for investors who are looking for regular payouts.
Liquidity
Shares tend to be considered relatively liquid assets. As such, this means they can be bought and sold quickly on the stock exchange. This means they can provide investors with the ability to access their funds, should they need to.
Ownership in companies
When a trader buys shares of a particular company, they become a partial owner of said company. This ownership status can give them a stake in the company’s success, as well as potential dividends. Depending on the type of stock being bought, traders may gain voting rights.
Diversification
Trading and investing in a wide range of shares allows one to diversify their financial portfolios. Diversification helps to spread risk, thereby reducing the impact of poor performance from any one particular investment. In essence, it aims to not put every egg in one basket, which helps to reduce risk when trading.
Flexibility
Share trading typically offers flexibility in terms of investment strategies. This means investors and traders can choose between short-term trading strategies, for potentially quick gains, or slightly more long-term strategies that can assist with more significant growth potential.
Accessibility
Comparatively, share trading is accessible to a wide range of traders and investors, ranging from individuals to institutional traders. In addition to the evolution of technology, online trading platforms have now made it easier than ever before for people to enter and trade in the financial markets.
Learning opportunities
Engaging in share trading provides people with the opportunity to learn about various industries, companies, market trends, and even economic factors that could potentially influence a particular stock’s price.
Bottom line
On the whole, while trading shares comes with plenty of benefits and advantages, it also involves risks. These include market volatility, company-specific risks, and the potential to incur losses. Therefore, it is highly recommended traders conduct thorough research, develop a well-thought-out trading strategy, and consider seeking professional advice to help them make informed decisions that align with their financial goals and risk tolerance level.
