Advantages and Disadvantages of Common Stocks


Common stocks make up a large majority of stocks floating around the market. These particular types of stocks correspond for part ownership of companies that are publicly traded. Stocks trade usually on over the counter and regulated stock exchanges all over the world. Common stocks are vital components in every retirement portfolios along with short-term money investments and bonds. You can purchase common stocks from reputable brokers or hold these stocks indirectly via mutual funds. The proportion of common stocks with relevance to other assets depends on risk tolerance and financial objectives.

Common stocks are associated with advantages and disadvantages that individuals must be aware of. The advantages and disadvantages of common stocks are vital factors that individuals need to assess. The list of the pros and the cons of these stocks are as follows:

Advantages of Common Stocks

Deliver Large Gains
Common stocks have the capacity of bringing ultimately large gains unlike deposit certificates, bonds and other alternatives.

Serve as Ideal Investment
The possible loss from common stocks that are purchased on cash basis is limited to entire amount of initial investment. This seems to be better than leverage transactions wherein maximum loss exceeds the entire amount of money invested.

Offer Restricted Legal Liability
Passive common stocks holder or those who are not taking active part in running the company are safeguarded from any liability branching from company’s actions beyond the stockholders’ financial investment in that company.

Can be Sold and Bought Easily
Common stocks are liquid so these can be sold and purchase at fair price easily and quickly. This also offers high returns as compared to other types of investments.

Offer High Earning
Common stocks offer high earning possibility. As compared to certificate of deposits and bonds, common stocks offer better opportunities that yield to higher returns of investment. These stocks are said to have no particular limit. You might lose money but there is no exact limit on the amount of money you earn or gain.

Disadvantages of Common Stocks

Getting the Last Payment
One of the disadvantages of common stocks is that during events that the company liquidates, common stock holders get the payment last. Bondholders, preferred stock holders and other debt holders are paid first before money is distributed to common stock holders.

Difficult to Control
Common stocks can be impossible or difficult to control unlike your other investment. In case individuals decide to invest in their own companies or businesses, they have to establish better business practices and strategies. Investing in these types of stocks also means subjecting yourself to the decision and will of other stockholders.

Common stocks carry great risk as compared to other options for investment. Though common stocks have successfully outperformed other types of investments, this is still linked to considerable amount of risks when not handled well.

The advantages and disadvantages of common stocks are things that individuals must be aware of especially those who are looking forward for higher financial gain.