Why invest in company shares? Advantages and risks of investing in stocks

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What’s on this page?

1. Is investing in stocks worthwhile?
2. Potential advantages of buying stocks
3. Risk vs reward of stock trading
4. Risks when buying stocks
5. Common vs preferred stock
6. Investing in ETFs vs investing in stocks

Is investing in stocks worthwhile?

Whether or not investing in stocks is worthwhile for you depends on your financial situation and goals. While company shares that you own can generate a return on investment (ROI), it’s important to remember that past performance isn’t a guarantee of future returns and that you could lose money due to stock prices falling.

If you’re willing to take on the risks involved, then investing in company shares can be a way for you to profit from stock prices going up. Additionally, you could earn a passive income through dividend payments, if they’re offered.

1. Share price appreciation
2. Income from dividends

1. Share price appreciation

Share price appreciation enables you to sell stocks that you own at a price that’s higher than the original buy price. The greater the difference between the buy and sell price, the higher your return on investment.

Below is an example of share price appreciation – it shows the price action of Apple from January 2008 to January 2025.

2. Income from dividends

Dividends are periodic payments that a company makes to its shareholders from its revenue. Not all companies make dividend payments, meaning you’ll only receive these if the company you’ve invested in pays them. It’s important to note that dividends work differently for common stock versus preferred stock.

Stocks with a track record of paying regular and predictable dividends are known as ‘dividend stocks’ or ‘income stocks’. When a company that you’ve invested in pays dividends, your allotment will be paid into your investment account. You can either withdraw your dividend received or use it to buy more shares.

Earning a dividend income can have a big impact on your returns over time. You can build long-term wealth by reinvesting your cash dividend using the compounding effect, eventually yielding more returns. Compounding is exponential, meaning that the value of your investment can grow significantly in the long term, depending on share price appreciation.

Potential advantages of buying stocks

There are several potential advantages of buying stock. They include:

• Higher returns than cash investment: cash investments are low risk, but returns on them are low, too. Investing in shares – on the other hand – is riskier, but the potential rewards can far exceed interest earned on savings
• Share price appreciation: companies are productive assets in the business of earning revenue. If revenue increases, a share of ownership in the company becomes more valuable, too
• Dividends: you’ll receive dividend payouts from your holding, provided that the stock you’ve invested in pays dividends and you’re eligible to receive them
• Protection against inflation: although share prices often drop when inflation first hits, their value usually adjusts after a while, protecting wealth against the corrosive effects of the rise in goods and services costs
• Diversification: buying and holding exchange-traded funds (ETFs) mitigates risk through exposure to different markets in a single investment
• Liquidity: stocks can generally be bought and sold quickly at their market price, which makes it easier for you to get exposure or to sell your holdings
• Small and discretionary outlays: you’re not required to commit a large outlay in one go, so you can invest smaller amounts at your discretion

Risk vs reward of stock trading

As with all investment activities, the trade-off for stock trading potential advantages is the risk that you assume. Risk is the chance that you may lose a part of, or all of, your investment amount, which is a factor of uncertainty.

The more uncertain the outcome of an investment, ie the more risky it is, the greater the potential reward. How you decide to navigate risk depends on your individual preferences and risk tolerance. But it’s still useful to always have a risk management strategy in place.

Evaluating your appetite for risk

There are several things to consider when analysing your risk appetite, including:

Risks when buying stocks

As with all investments, there are risks involved when buying stocks. So, it’s important to be thorough in doing your research and planning how you’ll manage your risks before you commit any capital.

Here are some of the types of risks that you can take into consideration:

• Investment risk: the level of uncertainty inherent in all types of investing. The potential return normally moves in tandem with the possible risk level
• Company risk: there are firm-specific risks – including operational, financial and strategic aspects – that can affect a stock’s performance negatively
• Market risk: losses that you might incur due to the market that you’re invested in being affected by factors that cause unfavourable price movements
• Share price volatility: when a market goes up and down sharply, rapidly and unpredictably, there’s uncertainty and increased risk
• Exchange rate risk: there’s potential for losses or gains being affected by forex rate movements between your withdrawal currency and the currency you use to get exposure
• Liquidity risk: a company not having enough assets that can be converted into cash to meet its financial obligations timeously could impact its share price

Common vs preferred stock

Common and preferred stock have different features. Which stock type you buy depends on your goals.

• Common stock: shareholders have voting rights and receive dividends, provided that the company pays them
• Preferred stock: shareholders are priority recipients of dividends, but they usually don’t get voting rights

If you’d like to earn a passive income through stock trading, it could be useful to consider preferred stocks. Here’s why:

As a preferred stockholder, your expected income stream tends to be more dependable as there’s typically a fixed amount for dividend payouts. The income you earn from your shares is likely to be higher compared to what’s paid to common stockholders. Preferred stockholders also receive their dividends before payouts are made for common shareholders.

As a preferred shareholder, you’re privy to different types of shares, eg:

• Cumulative preferred shares protect you in cases where a company is unable to pay dividends due to decreasing profits or the company being loss-making. In such instances, dividends can be carried forward and paid when the company makes profits and is able to pay. Unpaid dividends would be paid to you first, and then to common stockholders
• Participatory preferred shares refer to when you’re guaranteed additional dividend payouts, above the normal fixed dividend rate, provided that the company you’ve invested in meets specific financial objectives

Investing in ETFs vs investing in stocks

ETFs are instruments that track the performance of a group of underlying assets such as indices, commodities and currency pairs. You can diversify your investment risk using ETFs, as they offer a single entry point for access to a wide variety of markets.

Stocks, on the other hand, give you more focused exposure. When you buy and hold a stock, you become a shareholder of that individual company. While investing in a single stock is technically more risky, there are companies that are regarded as more stable than others, eg companies with a larger market capitalisations.

With us, you can choose from more than 10,000 ETFs and stocks to invest in using a stock trading account.

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