What is the disadvantage of the stock exchange

Pros & cons of stock trading

Besides the usual Basis Risks When investing money, there are also special risks with stocks:

Business risk:

As a co-owner of the stock corporation, you are involved in the economic development of the company, in extreme cases also in bankruptcy. In the event of bankruptcy, the liquidation proceeds are first used to satisfy all creditor claims before the shareholders receive anything.

Exchange rate risk:

Share prices are subject to unpredictable fluctuations. A basic distinction is made between market risk and company-specific risk. In the case of the former, the price change is due to the general trend on the stock exchanges, without any direct connection with the economic situation of the company in question. Economic, currency and monetary policy are important here. The company-specific risk, on the other hand, relates to a possible price decline that can be attributed to factors affecting the company. Decisive for the course are e.g. the company's success (profit / loss) or changes in management.

Dividend risk:

There is no guarantee of dividend income, as it is largely based on the company's profit.

Psychological risk:

Not only objective factors but also irrational or mass psychological behavior influence investor decisions. The market sentiment, market technology or so-called opinion leaders (e.g. analyst recommendations or stock market letters) can influence investor behavior.

Summary of advantages and disadvantages of stocks:

Advantages:
  • Participation in the company's success. There are two sources of income: dividends and price gains. In the long term, stocks are among the most profitable asset classes.
  • The risk is limited to the share capital. As a shareholder in the company, you are therefore not liable with your private assets in the event of insolvency.
  • Stocks in listed companies are typically traded on a regular basis. This form of investment is therefore considered to be very liquid.
  • With an equity investment, there is the possibility of reducing the risk of loss through diversification, i.e. a breakdown into different industries and countries.
  • With thousands of stocks traded around the world, investors have a huge choice of companies of all sizes, from different industries and from different countries.
Disadvantage:
  • Neither a dividend nor price gains are guaranteed. In the short term, high losses must be expected due to possible exchange rate fluctuations.
  • In extreme cases, there is a risk of total loss of the capital invested, for example due to the transfer risk, in the event of insolvency or if the shares are no longer traded and thus no buyer can be found.
  • In addition to the usual basic risks associated with an investment, such as the economic risk or currency risk, shareholders also bear some special risks. The corporate risk, the exchange rate risk, the dividend risk and the psychological risk are of particular importance here.

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