PROS AND CONS OF STOCK MARKET

Category: Finance

Stock market refers to exchange of securities in the shares of publically held companies that can be bought and sold by investors. It takes place in over-the- counter (OTC) marketplaces that operate under certain rules and regulations. Stock markets operate in two ways- primary and secondary market, as primary market, the stock market allows companies to get listed for the first time through the process of Initial Public Offering (IPO). This process helps the company to expand and raise capital from investors like general public. When an already listed company wants to expand further, it presents additional shares in the marketplace where all the buying and selling of shares take place through rights issues or follow-on offerings. They may even buy back or delist their shares. All these take place in the secondary market. Investors become fractional owners of the company with expectation of profits, that share value will rise or that they will receive dividend payments or both. In India Securities and Exchange Board of India (SEBI) regulates the stock market. It is a platform where savings and investments of individuals are properly led into investment options that give viable returns adding upto capital formation and overall economic growth of the country. The pros and cons of stock market that every investor must keep in mind are as follows- PROS 1. Potential for high returns and high liquidity- capital market or stock market offers high returns compared to other investment options in the long term. Investors have the benefit of dividend income and capital appreciation with high liquidity as a merit for investors too. Investors can buy and sell shares with ease and accessibility. 2. Ownership rights- when an individual buys shares they become a fractional owner of a company, thus enjoying both dividend payments and capital appreciation. This also entitles individuals to attend meetings and have voting rights enables shareholders to have an important say. 3. Transparency- once a company is listed, it becomes a publically traded company with subject to trade regulations and rules. This allows investors to be informed of all the proceedings and ensures transparency. 4. Economic growth and market efficiency- stock market fosters economic growth by giving companies the access to capital by contributing into the economy by giving employment and expanding operations. Market efficiency is managed by adjusting the likelihood of undervalued or overvalued assets. CONS 1. Volatility and the risk for loss- stock market is prone to short term fluctuations that make the market structure highly volatile. Economic conditions, geopolitical events, and investor sentiment are the various events contributing to volatility of stock market that can in turn lead to huge losses of losing part or all of the invested capital, especially in individual stocks. Prevalence of high-frequency trading can lead to increased market volatility. 2. Short term focus- investors prioritize short term gains over long term profits which shouldn’t be done. It leads to market inefficiencies contributing unfair advantages for certain individual participants. It also undermines the market integrity. 3. Information asymmetry- being the fractional owners of a company every individual is entitled to have voting rights and transparency of all the policies. But it might always not be the case thus giving some investors the unfair disadvantage. Smart Policy is an investment company committed towards helping individuals fulfil financial goals by advising well informed investment decisions. Investing in mutual funds is a reliable and risk free path towards wealth accumulation, retiring in comfort and funding of education. We are dedicated towards our investors’ well-being and maintain utmost transparency with regulatory oversight. Smart Policy is the partner of choice for investors on the path towards financial independency, well-being and unlocking potential for a prosperous future.