Pros and Cons of Buying Stocks - Experian (2024)

In this article:

  • Pros of Buying Stocks
  • Cons of Buying Stocks
  • How to Decide if Buying Stocks Is Right for You

Buying stocks isn't for everyone, but including them in your investment portfolio, along with mutual funds, exchange-traded funds and other assets, can help diversify your portfolio and potentially offer greater returns over time.

Buying stocks has both benefits and drawbacks to consider, especially if you're a new investor. It's important to consider several factors before making a decision about your portfolio. Here's what to keep in mind.

Pros of Buying Stocks

Whether you buy stocks individually or through a fund, there can be several advantages for your portfolio.

Long-Term Gains

The stock market can fluctuate quite a bit in the short term, but it can be a great place to put your money to work for long-term goals.

The average annualized return for the S&P 500—a stock index that tracks the 500 of the largest companies in the U.S.—has been roughly 10% since its inception in 1957. If you're saving for retirement or have other financial goals that span several years, short-term volatility often smooths out into a general upward trend.

Many stocks also offer dividends, which can further increase your returns.

Short-Term Opportunities

While most investors should avoid trying to time the market, there can be some excellent opportunities to earn sizable short-term gains if you're a savvy and experienced investor.

Easy to Buy and Sell

Opening a brokerage account typically only takes a few minutes, and once your account is funded, you can buy and sell stocks fairly easily. If your broker offers a mobile app, you can often trade stocks with just a few taps on your screen.

It also doesn't require a lot of money to get started. Many online brokers now offer fractional shares, which allow you to buy a portion of a company's stock instead of one full share. Minimums can be as low as $1.

A Sense of Ownership

If you love a certain company's products or services, owning shares of its stock can give you a sense of ownership in something you enjoy. You can also include stocks in your portfolio from companies that align with your values, such as sustainability, social justice or diversity.

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Cons of Buying Stocks

While there are some great reasons to invest in the stock market, there are also some downsides to consider before you get started.

Risk of Loss

There's no guarantee you'll earn a positive return in the stock market. In fact, investors are regularly cautioned that the past performance of a stock—or the market as a whole—doesn't guarantee future results. Stocks are most susceptible to losses in the short term.

Even in the long term, though, there's no guarantee that you'll generate the returns you want. If there's an economic downturn and an ensuing stock market crash at the wrong time, it could be financially devastating.

If you're looking for an investment with less risk—albeit with the potential for a lower return—you may consider bonds, money market funds and other low-risk options.

The Allure of Big Returns Can Be Tempting

Reading stories about investors making it big on short-term investments can make you feel like you can do it too. Online chatter and the media can bolster false confidence, even among inexperienced investors.

But investing with your emotions—whether excitement or fear—can get you in trouble fast. Before you try your hand at active trading in the stock market, it's important to research strategies and learn how to use the sophisticated tools and resources that the experts rely on.

Gains Are Taxed

With few exceptions, stock market gains are taxable when you sell your holdings. If you sell a position that you've held for less than a year, any gains you earn will be taxed at your ordinary tax rate.

If you hold on to a stock for more than a year, you'll be able to take advantage of a lower long-term capital gains tax when you sell. But that cost will still eat into your return. Even if you have a tax-advantaged investment account, such as a 401(k), individual retirement account (IRA), health savings account or 529 plan, you may still be subject to taxes in certain situations.

It Can Be Hard to Cut Your Losses

If a stock you invested in performs poorly, you may be tempted to hold on to it until it bounces back. If you can't bring yourself to cut your losses and make the necessary adjustments, your portfolio may continue to suffer.

How to Decide if Buying Stocks Is Right for You

If you're investing with a long-term goal in mind, such as retirement or education savings, the stock market can be a great place to put a good portion of your portfolio.

If you have some short-term financial goals, however, you may be better off putting the money in a low-risk vehicle, such as a high-yield savings account or certificate of deposit. If you're around five years out from your goal, you may opt for a mix of stocks and bonds, with more of your money in bonds to reduce your risk exposure. You may also consider other assets, such as real estate.

If you've decided to put some of your money in stocks, it may be a good idea to start with stock index funds, which can help diversify your portfolio, minimizing the risk associated with each individual stock. Once you have a good mix of stocks, you can consider investing in individual companies. But again, try to avoid putting too much of your portfolio in one stock or industry.

Instead of buying stocks based on recommendations, research the companies you want to invest in, so you can judge whether or not it's a good bet.

The Bottom Line

The stock market comes with a lot of ups and downs, so it's important that you understand what you're getting yourself into before you start investing. As you consider the benefits and drawbacks of stocks, think about your financial goals, including when you'll need the money, and your risk tolerance to determine the best way to diversify your portfolio.

You may also consider consulting with a financial advisor who can provide personalized and professional advice for your situation.

Pros and Cons of Buying Stocks - Experian (2024)


What are the pros and cons of buying stocks? ›

Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.

Does buying stocks affect your credit score? ›

Like other forms of investments, buying or selling stocks won't directly change your credit score, but they can indirectly affect it. However, there is an exception — margin accounts.

Is Experian a good buy? ›

Experian plc has 4.90% upside potential, based on the analysts' average price target. Experian plc has a conensus rating of Moderate Buy, which is based on 6 buy ratings, 2 hold ratings and 1 sell ratings.

What is the disadvantage of investing in stocks? ›

Disadvantages of investing in stocks Stocks have some distinct disadvantages of which individual investors should be aware: Stock prices are risky and volatile. Prices can be erratic, rising and declining quickly, often in relation to companies' policies, which individual investors do not influence.

What are 5 cons of investing? ›

While there are some great reasons to invest in the stock market, there are also some downsides to consider before you get started.
  • Risk of Loss. There's no guarantee you'll earn a positive return in the stock market. ...
  • The Allure of Big Returns Can Be Tempting. ...
  • Gains Are Taxed. ...
  • It Can Be Hard to Cut Your Losses.
Aug 30, 2023

What are the pros and cons of selling stock? ›

The infusion of capital access to expertise and enhanced reputation are among the notable benefits. However, the potential loss of control, dilution of ownership, shareholder expectations and disclosure requirements must weigh against these benefits.

What happens to your money when you buy a stock? ›

If you buy a company's stock, you become a part owner and you'll generally make money if the company does well—or lose money if it doesn't. Depending on how established the company is, most of the money you make will come either through increases in share price or through dividend payments.

Can you go into debt from buying stocks? ›

Can You End Up in Debt If a Stock Goes Down? In a standard cash account, you can't end up in debt if a stock goes down. However, if you're trading on margin, that's a different story. Margin accounts can lead to debt if you're not careful.

Is it a good idea to invest in credit? ›

The absolute and risk-adjusted returns of credit funds typically improve total portfolio risk metrics. Credit usually has lower price volatility, but note that some credit investments are not priced daily, which can artificially lower their volatility.

Can Experian be trusted? ›

Credit scores from the three main bureaus (Experian, Equifax, and TransUnion) are considered accurate. The accuracy of the scores depends on the accuracy of the information provided to them by lenders and creditors.

What are the disadvantages of Experian? ›

The main disadvantage of Experian is that, unlike FICO, it is rarely used as a stand-alone tool to make credit decisions. Even lenders that review credit reports in detail rather than go off a borrower's numerical score often look at results from all three bureaus, not just Experian.

Is Experian reliable and safe? ›

Yes. Along with TransUnion and Equifax, Experian is recognized by financial institutions around the world as a safe, authoritative and trustworthy credit reporting agency.

What is a problem with investing in stocks? ›

Market risk is the possibility of losing money due to fluctuations in the prices of stocks or the overall market. Market risk can be caused by factors such as economic conditions, political events, natural disasters, or investor sentiment.

Who are pros in stock market? ›

PRO is propreitary or brokerage firms trading on their own behalf. FII is Foreign investors. DII is Domestic investors. Clients are clients of brokerage firms (so all retail will fall under this).

How much stock should a beginner buy? ›

Most experts tell beginners that if you're going to invest in individual stocks, you should ultimately try to have at least 10 to 15 different stocks in your portfolio to properly diversify your holdings.

What are the advantages for stocks? ›

Stocks can be a valuable part of your investment portfolio. Owning stocks in different companies can help you build your savings, protect your money from inflation and taxes, and maximize income from your investments. It's important to know that there are risks when investing in the stock market.

Why is it risky to buy stocks? ›

Stocks are much more variable (or volatile) because they depend on the performance of the company. Thus, they are much riskier than bonds. When you buy a stock, it is hard to estimate what return you will receive over time (if any). Nonetheless, the greater the risk, the greater the return.

Are stocks a good thing to invest in? ›

Consider the following before you buy individual stocks: Tax control advantages4: With individual stocks, you control when to buy and sell. Individual stock ownership may reduce your tax burden. Cost-efficiency: If you intend to hold your equity investment for a long time, buying individual stocks may be cost-effective.

Is it still a good idea to invest in stocks? ›

If you're looking to invest for your future -- five, 10, or 40 years from now -- now is as good a time as ever to buy stocks. Despite ongoing recession fears, it's important to remember the market is forward-looking.

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