What are the pros and cons of stock market investment?

A share (also called an equity or equity stock) in a company is exactly that: a share in the ownership of the company. With that comes a share of the profits and the risk that you will lose your money if the company goes bust.

Almost all companies have limited liability. This means that if you own a share and the company does go bankrupt your liability (i.e. what you owe to the creditors) is limited to the paid up value of your shares. That means that if you own share in a company that goes bust you will not lose your house because of that!

Is important to understand the ways shares can make you money. Generally shares pay a dividend to investor which is share of the companies profits. Not all companies pay dividends but instead hope to reward investors by increasing the price of the shares over time (this is called capital growth)

The advantages of investing in shares –

Long Term Growth Potential – one of the biggest attractions of the stock market is the long term growth potential. The power of compounding your returns and your dividends can create considerable wealth over the long term.
History Shows Stocks Beat Cash – If we look back through history, the stock market has shown it always beats cash in the long term and more importantly it always beats inflation
Great opportunities -As you will undoubtedly be aware, the markets have been very volatile lately. There are two ways to look at this, you can be fearful or you can take advantage of the opportunities that arise.Personally, I love volatility, when the market is in “panic mode”, it moves on peoples emotions rather than logical economic fundamentals. This usually creates some fantastic bargains.

The disadvantages of investing in equities-

The risk that the company will become bankrupt and your shares in that company will be worthless.
The risk that the price of your shares will fall when you want to sell them so that you get back less than you paid for them.
Returns are unknown so it can be hard to plan you finances in advance.

Here are 10 lessons from the book that are extremely useful.

1. Investing is hard work

“People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.”

2. It is important to recognize who you are…. Speculator or Investor

“A man must know himself thoroughly if he is going to make a good job out of trading in the speculative markets. To know what I was capable of in the line of folly was a long educational step. I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting the swelled head.”

“Speculators buy the trend; investors are in for the long haul; “they are a different breed of cats.” One reason that people lose money today is that they have lost sight of this distinction; they profess to have the long term in mind and yet cannot resist following where the hot money has led.”

3. History, Experience and Mistakes are the best teachers

“Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again. I’ve never forgotten that. I suppose I really manage to remember when and how it happened. The fact that I remember that way is my way of capitalizing experience.”

“Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy, on the New York Stock Exchange as on the battlefield. I think the clearest summing up of the whole thing was expressed by Thomas F. Woodlock when he declared: “The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past.”

“If a man didn’t make mistakes he’d own the world in a month. But if he didn’t profit by his mistakes he wouldn’t own a blessed thing.”

4. Ignorance, Greed, Fear and Hope are the 4 deadly sins

The speculator’s deadly enemies are: Ignorance, greed, fear and hope. All the statue books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal.

5. Uncertainty & Indecision are harmful for your financial health

“A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.”

6. Do not average your losses

“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”

7. If you are wrong cut your losses

“Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.”

8. Let your Position not dictate your view

When I am long of stocks it is because my reading of conditions has made me bullish. But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions – or my prepossessions either – to do any thinking for me. That is why I repeat that I never argue with the tape.

9. Sometimes it is important to do nothing

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

10. Do not plan your expenses based on your potential Trading Profits

There isn’t a man on Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting.