Pros And Cons Of Investing In Stocks

If you are going to pick stocks yourself, get ready to understand the company you will invest in. Your decision will be based on factors like how competitive the company is in what it produces, the demand for who it produces, its growth rate, the management's integrity, etc. And your work does not stop once you buy the stock. You have to continually monitor if the company is meeting expectations. If you are going to pick stocks without understanding the companies you invest in or on other people's advice, you are making sure that you end up losing money. The other problem with investing in stocks is that you are unable to diversify or spread your risk if you have a small amount to invest. For example, a mutual fund allows you a share of many stocks. On your own you may end up buying just one or two stocks with the money you have and your investment will ride or sink with what happens to those stocks. And don't forget the tax implications of your stock transactions. If you buy and sell within a year, you get hit with a tax on short term capital gains, that's a tax of 30 per cent. The income tax department could even consider your gains speculative. If you hold the shares for longer than a year, the tax is a much lower 10 per cent. But either way you need to keep good records. If you buy and sell the same share, you will have to follow a FIFO record keeping which means that the share you bought the earliest is the one you sell first. Moreover, stocks don't get you any tax deductions. So if you need tax deductions to keep your income to a minimum, please use up the tax planning products available like the PPF before you invest in stocks. Another factor to consider when investing in stocks is the brokerage commissions. Though commissions have been dropping sharply, they are still a cost to consider.