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Merits and demerits of Stock trading

Jan 14, 2022 08:12


Have you heard from a friend or relatives or office colleagues that they have earned good amount of money in trading stocks then you also take it as good idea to explore. But step back due to the risk associated with it.

However diversifying your financial portfolio beyond fixed deposits, gold, and mutual funds is necessary and there are great benefits attached to it. Historically, the stock market has delivered generous returns to investors over time thus becoming a good choice.

Now you can easily trade stocks to reap the benefits of investing in stocks. 

Merits of stock trading:

The stock market provides the trader with several merits and helps them with the easy handling of their money. We have listed few important ones below :

1. Advantage of the Booming Economy

Merits and demerits - 2

The stock market is an important element in growing economy and tends to react to all the economic growth indicators like GDP, inflation, corporate earnings, and so on. Stock market gives the opportunity to take direct advantage of a booming economy and the value of the investment in stock market grows in proportion to economic growth.

As the economy grows, corporate earnings are boosted. That’s because economic growth creates jobs, which creates income, which creates sales as a result of which the average income of an individual increases. This in turn, affects consumer demand, leading to an uptick in sales. Hence, the value of the investment in a particular company increases i.e the share price increases.

2. Helps to stay ahead of inflation

Stocks have averaged an annualized return of 10% historically. This is better than the average annualized inflation rate which usually tends to be 3-4%. This means that long term investment is better in stocks.

3. Benefit of Dividend

A dividend is an extra income for investors, which is paid annually by most companies. Dividend payments arrive even if the stock has lost value and thus give additional income on top of any profits with trading stocks.

These dividend incomes too have a lot of benefits. They can fund a retirement, Help you grow your investment portfolio etc.  

4. Easy to buy

Stock trading makes buying stocks of the companies, easy. You can purchase them through a broker like Winstone Prime. After Account setup, you can buy stocks in minutes. Few online brokers like Winstone Prime, let you buy and sell stocks with low commission.

5. Make money in two ways

Most of the traders intend to buy low and then sell high. They choose fast-growing companies that appreciate in value. Both day traders and long term investors get attracted by this.

Day traders hope to take advantage of short-term trends, whereas the long term traders expect to see the company’s earnings and stock price grow over time. Both of them trust that their stock-picking skills will lead them to make success in the market.

The rest traders prefer a regular stream of cash. They deal with stocks of companies that pay dividends. Those companies grow at a moderate rate.


That said, every coin has two sides, even Stock trading has few demerits:

1. Risk associated with trading

You could lose your entire investment in stock trading. Suppose a company performs low, investors will sell which will send the stock price plummeting. Thus when you sell you might lose your initial investment too.

2. Time required

Researching a company is very important before you buy stocks of that company. You must research each company to determine how profitable you think it will be before you buy its stock. You must learn how to read financial statements and annual reports and follow your company’s developments in the news. Also you should keep a track of the company’s performance which needs time.

3. Getting Emotional

Stock prices fluctuate second to second. Usually traders tend to buy high due to greed and sell at low price due to fear.  It is always advisable to keep emotions aside and look at the price fluctuations of stocks, and just check in on a regular basis.

4. Professional competition

Institutional investors and professional traders have ample of time and knowledge to invest in trading. They make use of sophisticated trading tools, financial models and advanced computer systems and take advantage over a retail investor.

Diversification is main in stock market:

1. Diversification of investment 

A diversified portfolio helps you in getting more advantages and fewer disadvantages than involving in stock market alone. A mix of stocks, bonds, commodities, currencies and cryptos will help you to gain high returns with manageable risk.

2. All Company sizes

A mix up of  different-sized companies (large-cap, mid-cap, and small-cap companies) is better while choosing the stocks as they perform differently in each phase of the business cycle.

3. Geographic location

Choose companies located in the United States, Europe, Japan, and emerging markets. With Diversifying the stocks, you can reap the advantage of of growth without being vulnerable to any single stock.

Final words

Stock market helps in diversification of your financial portfolio and allows you to stay ahead of inflation. Stock market has many benefits that you can take advantage of, however be aware of the risk associated with that. Open account now and start trading stocks.

Happy trading !!!

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