Finance

Pros and cons of share market trading

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Having come a long way from being an open outcry auction system to a largely online format, the share market, today, offers a wide range of advantages to investors interested in engaging the financial marketplace. Although most first-time investors may find online trading intimidating, its many pros can offer value-added opportunities to investors looking to build wealth.

Here we look into the pros of stock trading in the share market.

  • Exceptional returns: Historically, shares in the Indian stock market have provided one of the highest profits as compared to traditional asset classes and investment avenues. To grow your portfolio, investing in equities is considered the right approach. For instance, people who invested in companies such as Amazon, Apple and Google when these companies first started, today have made incredible amounts of profits. However, the caveat to this is, while exceptional returns can be gained from the stock market, the possibility of significant risks is just as high.
  • Dividend returns: Leading listed companies typically apportion a part of their earnings to their shareholders. If you are considering a passive income, a dividend growth strategy can give you bounteous returns.
  • Diversified assets: As an investor in the stock market, you can invest in a wide range of stocks across countries, sectors, categories and industries that offer potential growth opportunities. Spreading your investment across asset classes can diversify your risk and prevent major losses.
  • Liquidity: Almost every stock trading on the Sensex or the Nifty can be easily purchased and sold in a single trading session. This level of liquidity can give you the flexibility of converting your stocks into cash quickly when required. The online trading marketplace has helped streamline market participation, and hence, you can quickly enter or exit an open position within a given trading day.
  • Easy access to markets: A trading and Demat account registered with a reputed broking service company such as Kotak Securities are all that is needed to access the stock market and begin trading online. On selecting the right brokerage firm you can be assured of market access with computing power and Internet connectivity.
  • Discounted transaction costs: Until a while ago, the price of trading on the stock exchange was exceptionally high, based on the size and type of order transacted. Today, online broking services offer discounted rates and fees to execute trade orders. With reduced trade-related commissions and fees, an investor with limited capital can quickly begin trading in the stock market.

And while online trading offers many potential benefits, there is an equal number of drawbacks. Trading securities online and off-line can be challenging and holds great risk. Here we look into the cons of share market trading.

  • Volatility: Stock prices are highly sensitive to good or bad news. Headline news can determine the rise or fall of stock prices and can cause an overreaction among susceptible traders and investors. This kind of volatility makes equities a highly risky proposition than other traditional assets. For example, unexpected news of any listed company could spark a rise or fall in its share value, causing vulnerable traders to be impacted.
  • Risk of losing one’s investment: A poor performing company may not be able to give out dividends. Or, perhaps, its share prices have stagnated thus causing your investment to deteriorate.
  • Lack of discipline: Investors can gain access to many different markets on a 24 x 5 basis, thanks to online trading and the Internet. Constant access to trading markets worldwide can affect a trader’s emotional state, and result in fear or greed directing impetuous behaviour and leading to erroneous decisions.
  • Lack of knowledge or stock analysis: Investing in stocks without analysing its fundamentals of technicals can prove to be a grave mistake. Successful investors take the time and effort to study company stock to pick the right investment for long-term benefits. Similarly, the allure of ‘get rich quick’ schemes, market manipulation, negligent analysis and negative factors others can challenge consistent profitability and impact one’s investment.

Summary

The online share market offers a wealth of opportunities and unique risks at the same time. As an investor, you must weigh the pros and cons to decide on an appropriate course of action based on various risk factors and capital consideration.

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