List of Disadvantages of Common Stocks
1. High risk investment.
Risks are always associated with investing, but more of these are linked to common stocks. Their prices are volatile, fluctuating erratically. If you panic every time the price goes down and sells your stocks, you could end up losing more. The value of the stocks can also change without warning, making it difficult to evaluate their performance even if the company is doing well. Worse, if the business goes bankrupt, you can say goodbye to your investment.
Risks are always associated with investing, but more of these are linked to common stocks. Their prices are volatile, fluctuating erratically. If you panic every time the price goes down and sells your stocks, you could end up losing more. The value of the stocks can also change without warning, making it difficult to evaluate their performance even if the company is doing well. Worse, if the business goes bankrupt, you can say goodbye to your investment.
2. Lack of control.
Buying stocks from a company is a tricky situation. Your success practically depends on whether or not a business has excellent practices and strategies. Since you have no right to demand a copy of their books or business plans, you would have to do your research in other ways. As a shareholder, you are also subject to the will of stockholders. You cannot join in the decision-making process or suggest a better way of doing things. Therefore, if stockholders don’t do their jobs well, you could go down with them. This is why it is vital that you perform due diligence before you invest.
Buying stocks from a company is a tricky situation. Your success practically depends on whether or not a business has excellent practices and strategies. Since you have no right to demand a copy of their books or business plans, you would have to do your research in other ways. As a shareholder, you are also subject to the will of stockholders. You cannot join in the decision-making process or suggest a better way of doing things. Therefore, if stockholders don’t do their jobs well, you could go down with them. This is why it is vital that you perform due diligence before you invest.
There is one way to have some control, however. You have to buy a significant amount of shares to gain a majority in the investment. Unfortunately, not everyone will be able to afford this. Moreover, companies usually put a cap of the number of common stocks they sell to keep the control of existing shareholders strong.
3. Last one to get paid.
This is probably the biggest downside of common stocks. As previously mentioned, if a company liquidates, you would not get paid until those that rank high on the priority ladder gets their share. Good enough if you get to pull out your stocks just in time. But because stocks don’t always behave as consistently, anticipating its performance would be difficult. You can only hope that you do get paid, after everyone else does, including the creditors, employees, suppliers and taxes.
This is probably the biggest downside of common stocks. As previously mentioned, if a company liquidates, you would not get paid until those that rank high on the priority ladder gets their share. Good enough if you get to pull out your stocks just in time. But because stocks don’t always behave as consistently, anticipating its performance would be difficult. You can only hope that you do get paid, after everyone else does, including the creditors, employees, suppliers and taxes.
On the side of an issuing company, selling too many common stocks can have a negative impact on the existing shareholders. It is bad news if the business keeps increasing its outstanding shares. According to the Wall Street Journal, the ownership of shareholders and voting influence will diminish when the stocks enter the market.
When it comes to common stocks, getting the companies right is just as important as getting the price right. The best combination would be to buy stocks at a fair price from a company with a strong and longstanding reputation in the market. Unfortunately, the stock market is not always cooperative. Or make that rarely cooperative. This is why timing and research are very important.
No comments:
Post a Comment