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

Is investing in shares 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.

Understanding dividend stocks

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

The power of dividend reinvestment

Earning dividend income can significantly impact your returns over time. By reinvesting cash dividends, you can build long-term wealth through the compounding effect, potentially yielding greater returns. Compounding works exponentially, meaning your investment value can grow substantially over the long term, depending on share price appreciation.

Potential advantages to buying stock

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) can help to mitigate 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 share trading

As with all investment activities, the trade-off for the potential advantages of share trading is the risk 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.

Learn more about risk and rewards

Evaluating your appetite for risk

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

• Investment goals
• Investment timeframe
• Risk profile

Investment goals

When investing, it’s important to ask yourself what you hope to achieve. The following questions cover some of the key aspects that could help you establish the investment approach that’s most suitable for you:

• Why am I investing?
• Am I looking to gradually grow a capital amount?
• Am I looking to take on increased risk with the expectations of earning higher returns?

Investment timeframe

If you intend to invest for a long period, eg a 10-year timeframe, you could decide to assume more risk as you’re less exposed to day-to-day price volatility. If your investment horizon is shorter, you might choose stocks with lower risk since you’d be more exposed to price fluctuations.

Risk profile

You have a risk-averse profile if you aim to minimise the probability of incurring losses in return for a higher probability of making profits. This approach limits how much you can potentially make in ROI.

If you’re aiming for higher returns regardless of increased uncertainty, on the other hand, your profile is risk seeking. This means that you accept the possibility of losing bigger amounts in return for more in potential gains.

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 quickly 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. The type you buy depends on your goals.

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

If you’d like to earn a passive income through share 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 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.

Learn more about ETFs

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 11,000 ETFs and stocks to invest in using a share trading account.

Learn more about stocks

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