Advantages & Disadvantages of Stock Markets
11 SEP 2015
A stock market is a major component of an economy and has far-reaching effects. Even if much of a society's individuals are not directly involved with the stock market, they are still affected by its advantages and disadvantages. And for some participants, the stock market plays a pivotal role in their lives.
1 Corporate Capital
The most notable advantage of the stock market is that it provides operating capital to corporations. Investors purchase shares of ownership in a company, and this revenue can lead to a large influx of money for the corporation. The first sale of stock to the public by a private company is called an "initial public offering," or IPO, and is often the only way a company can expand or embark on particularly ambitious projects.
2 Capital Gains
An investor may sell shares that increase in value for a profit called capital gains. The stock market has a history of offering consistent long-term gains over time. The average annual returns, adjusted for inflation, are approximately seven percent. However the returns in any given year may be significantly above or below this average.
While the stock market provides long-term success in most cases, short-term fluctuations in market conditions can lead to dramatic losses. This is a serious disadvantage of the stock markets. Unlike a cash-based investment, such as a savings account, which offers a steady and predictable profit, stock markets are highly volatile. According to an October 2008 Washington Post article, retirement assets held in stock market accounts decreased in value by $2 trillion in only 15 months during the bear market of 2008.
Trading in the stock market is a considerable challenge for many of its beginning participants. The possibilities for vast profits invite many to try stock trading. However, active trading is exceptionally difficult and stressful work, and this is a disadvantage of the stock market. Many lose money in the process of learning. This loss is coupled with the psychological effects of considerable frustration and disappointment at the experience.
One advantage of the stock market is the industry it has created with a wide variety of jobs. Many companies and professions exist solely because of the stock market. These include brokers, financial analysts, investment banks, investment advisers and finance education institutions.