What are the disadvantages of investing in shares?
In this article, we describe the biggest disadvantages of investing in stocks. By preparing well, you can minimize the effects of these disadvantages.
The biggest disadvantages of investing in stocks are:
- You can lose money with investing in stocks
- It can take a lot of time to select the right stocks
- The transaction fees on stock transactions can be high
- Investing in stocks can come with negative emotions
- In case of bankruptcy, you lose your investment
- You compete against professional investors
We briefly discuss each disadvantage to examine if it really is a problem.
Disadvantage 1: There is always risk involved
You can make a lot of money by investing in stocks. However, there are no guarantees: when you invest in stocks, you can also lose a lot of money, especially in times of falling prices.
By applying smart risk management, you can reduce the chance of loss. You can do this by:
- Diversifying your investments over different shares.
- Entering gradually: this is also called dollar cost averaging.
- Only investing money that you can miss.
Practice makes perfect, and this also applies to investing. Click here to try investing for free with a demo.
Disadvantage 2: It takes a lot of time
If you want to invest in stocks successfully, you need to do a lot of research. Randomly buying stocks is not a smart investment strategy. For example, you will have to research whether:
- The company you would like to invest in is financially healthy.
- The company can keep up with the competition.
- The sector and region are performing well.
- The company has a good plan for the future.
If this seems like too much work, but you still want to benefit from the stock market, it may be interesting to invest in ETFs. With an ETF, you can invest in the price movements of an entire stock market index at once. Click here to read more about this method of investing in shares.
Many investors discover that investing in stocks can be costly. This is especially the case when you invest in stocks with your bank. This is a shame; every dollar you pay in transaction fees limits the return you can achieve.
The purchase and sale costs you have to pay when investing in stocks depend on the party with whom you trade. It is recommended to compare the costs of different brokers with each other. With some brokers, it is even possible to invest in stocks without commissions, which allows you to get started with small amounts.
Click here to compare the best brokers & start investing.
Disadvantage 4: Emotions and the roller coaster ride
Stocks have only risen in the long term. However, this does not mean that you always make money with shares: especially in the short term, you can lose a lot.
Both novice and experienced investors sometimes have trouble with their emotions. They sell stocks in blind panic, which results in significant losses. Click here to read how your emotions can affect your investments.
Disadvantage 5: You are the last in line in the event of a bankruptcy
When the company goes bankrupt, the chances of getting your money back are slim. For example, bondholders receive their money first. Only if there is still money left after all creditors have been paid, will you receive something as a shareholder.
In practice, this means that you lose all your money when the company in which you own shares goes bankrupt. This makes it important to research the company’s standing thoroughly before investing in stocks.
Disadvantage 6: Professional competition
Finally, do not forget that as a private investor, you are competing against institutional, professional investors. Banks and insurance companies buy stocks worth billions of dollars.
Beating the market with speculation is almost impossible for novice investors. Therefore, focus on the long term: by doing so, you will probably achieve the best results.
Should you invest in stocks?
As you can see, investing in stocks has some disadvantages. Before we can draw a conclusion, it is important to discuss the advantages of stocks:
- Investing in stocks can help you build wealth.
- Shares have always performed better than bonds in the past.
- You can sell stocks at any time.
- Shares can protect you against inflation.
Do you think the disadvantages outweigh the advantages? Then you may be better off investing in another investment product. However, by taking the mentioned solutions into account, the disadvantages of investing in stocks do not have to be a major problem.
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click <a href="/about-us/">here</a> to read more about trading.info! Don’t hesitate to leave a comment under this article.