Question

In 500 word essay talk about the reasons for investing in the stock market with an emphasis on stocks, mutual funds and bonds. Compare the advantages and disadvantages of each of these options (stocks, mutual funds and bonds).

Answer 1

Reasons to Invest in Stock Market

Why should one invest in the stock market? Actually, there are several reasons to do so. Investing in stocks can provide impressive returns, and these gains can help investors successfully overcome inflation.

There is a significant wealth of information on this particular market, which can help individual investors to make better-informed decisions. In addition, numerous investment vehicles provide exposure to this market, offering investors many ways to get involved. Some of these investment vehicles are Stock, Mutual Funds and Bonds.

Startup is very Cheap

Investing in stocks is a well-worn path to making money work harder, but you don’t have to fork over thousands of dollars to get started. You can begin by setting aside the few dollars you would normally spend on a daily latte and investing the monthly total in stocks. It’s a virtually painless way to use your earnings in service of your future.

Outrun Inflation

Investing in stock market can help overcome the wealth-eroding effects of inflation, a factor that can slowly reduce the purchasing power of one's principal.

Grow Your Wealth

When you become an investor, you’ll be using your money to acquire things that offer the potential for profitable returns through one or more of the following:

• Interest and dividends from savings or dividend-paying stocks and bonds.
• Appreciation of value from a stock portfolio, Mutual Funds and Bond. .

Stock market is a place where you can see the power of compounding.

‘Compound Interest is the 8th wonder of the world. He, who understands it, earns it; he, who doesn’t pays it!’ – Albert Einstein

Now let us compare and discuss the advantages and disadvantages of Stocks, Mutual Funds and Bonds.

INVESTMETN IN EQUITY SHARE CAPITAL

ADVANTAGES:

DIVIDEND

An investor is entitled to receive a dividend from the company. It is one of the two main sources of return on his investment.

CAPITAL GAIN

The other source of return on investment apart from dividend is the capital gains. Gains which arise due to rise in market price of the share.

EXERCISE CONTROL

By investing in the company, the shareholder gets ownership in the company and thereby he can exercise control. In official terms, he gets voting rights in the company.

CLAIM OVER ASSETS AND INCOME

An investor of equity share is the owner of the company and so is the owner of the assets of that company. He enjoys a share of the incomes of the company. He will receive some part of that income in cash in the form of dividend and remaining capital is reinvested in the company.

RIGHTS SHARES

Whenever companies require further capital for expansion etc, they tend to issue ‘rights shares’. By issuing such shares, ownership and control of existing shareholders are preserved and the investor receives investment priority over other general investors. Right Shares are issued at a price lower than current market price of the equity share.

DISADVANTAGES

DIVIDEND

The dividend which a shareholder receives is neither fixed nor controllable by investor. The management of the company decides how much dividend should be given. If there is a loss, there is no question of dividend. If there is a profit, unless Board of Directors propose dividend, investors will not receive dividend.

HIGH RISK

Equity share investment is a risky investment as compared to any other investment like debts etc. The money is invested based on the faith an investor has in the company. There is no collateral security attached with it.

FLUCTUATION IN MARKET PRICE

The market price of any equity share has a wide variation. It is always very difficult to book profits from the market. On the contrary, there are equal chances of losses.

LIMITED CONTROL

An equity investor is a small investor in the company, therefore, it is hardly possible to impact the decision of the company using the voting rights.

INVESTMENT IN MUTUAL FUNDS

Mutual funds are investment vehicles that pool money from many different investors to increase their buying power and diversify their holdings. This allows investors to add a substantial number of securities to their portfolio for a much lower price than purchasing each security individually.

ADVANTAGES:

DIVERSIFICATION:

Mutual funds spread their holdings across a number of different investment vehicles, which reduces the effect any single security or class of securities will have on the overall portfolio. Because mutual funds can contain hundreds or thousands of securities, investors aren’t likely to be fazed if one of the securities doesn’t do well.

EXPERT MANAGEMENT:

Many investors lack the financial know-how to manage their own portfolio. However, non-index mutual funds are managed by professionals who dedicate their careers to helping investors receive the best risk-return trade-off according to their objectives.

LIQUIDITY:

Mutual funds, unlike some of the individual investments they may hold, can be traded daily. Though not as liquid as stocks, which can be traded intraday, buy and sell orders are filled after market close.

CONVENIENCE:

If you were investing on your own, you would ideally spend time researching securities. You’d also have to purchase a huge range of securities to acquire holdings comparable to most mutual funds. Then, you’d have to monitor all those securities. Choosing a mutual fund is ideal for people who don’t have the time to micromanage their portfolios.

DISADVANTAGES:

WHICH FUND?

DOW JONES contains only 30 stocks but there were more than 9000 Mutual Funds in 2017 in USA. So choosing which fund to invest is a hectic job.

NO CONTROL OVER PORTFOLIO:

If you invest in a fund, you give up all control of your portfolio to the mutual fund money managers who run it.

FEES AND EXPENSES:

Some mutual funds may assess a sales charge on all purchases, also known as a “load” – this is what it costs to get into the fund. Plus, all mutual funds charge annual expenses, which are conveniently expressed as an annual expense ratio – this is basically the cost of doing business.

INVESTING IN BONDS

Bonds are a debt security under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and or repay the principal at a later date, which is termed the maturity.

ADVANTAGES OF BONDS

Bonds have a clear advantage over other securities. The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks). Thus bonds are generally viewed as safer investments than stocks. In addition, bonds do suffer from less day-to-day volatility than stocks, and the interest payments of bonds are sometimes higher than the general level of dividend payments.

Bonds are often liquid. It is often fairly easy for an institution to sell a large quantity of bonds without affecting the price much, which may be more difficult for equities. In effect, bonds are attractive because of the comparative certainty of a fixed interest payment twice a year and a fixed lump sum at maturity.

Bondholders also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt, its bondholders will often receive some money back (the recovery amount), whereas the company’s equity stock often ends up valueless.

DISADVANTAGES OF BONDS:

Bonds are also subject to various other risks such as call and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk, sovereign risk, and yield curve risk.

Price changes in a bond will immediately affect mutual funds that hold these bonds. If the value of the bonds in a trading portfolio falls, the value of the portfolio also falls.

Note: Actual Word Count is 1260, you can reduce the number of advantages and disadvantages as per your requirement. I gathered this much information so that your concept may be clear.