Stock market trading is wildly popular across the globe, with billions traded in company securities and assets across many millions of investors. For the businesses selling their securities, stock market trading provides a key mechanism for raising finance, while also giving life to pensions, savings funds and individual investment portfolios. But like any activity, stock market trading has both advantages and disadvantages that must be weighed up in determining whether it’s a worthwhile pursuit for the individual would-be investor.

How Are Shares Priced?

Shares are priced by the market, and reflect the current market value for a share at any given moment. As a share is bought, the price of those shares rises incrementally. Similarly, as a share is sold, the price of the share and the share market falls by the increment of the sale, thus the share price at any particular time is reflective of the intersection between shares being bought and shares being sold. This is the definition of market price, and given the liquidity of the share markets, traders can be satisfied that the price produced by the market is reflective of the going market rate – whether or not that price is in fact over or underestimating the true inherent value of the share.

See how share trading differs from forex markets.

Trading Advantages

Rate of Return

Perhaps the main advantage stock market trading brings to the table is its inherent ability to deliver significant rates of returns. Contrasted with an interest-bearing bank account which might pay 5% per annum if you’re lucky (without factoring in applicable taxes and the impact of inflation on the value of capital), stock market trading can see a 5% return over the course of one day, and oftentimes even more for the shrewd investor.

Acquisition of Assets

Unlike speculating on index movements, trading on the stock markets sees the acquisition of real, valuable assets in the form of the shares that are bought. Unless something goes disastrously wrong with the underlying business, any shares you acquire will retain some value that can be extracted at a later stage, making it a more secure investment with life-long value locked in.

Dividend Yield

Because shares entitle the bearer to an annual dividend payment on a per share basis, they also produce an ongoing revenue stream in the good times. Furthermore, the payment of dividends receives a more favourable tax treatment in the UK, with basic-rate tax paying recipients in effect paying 0% on the dividend revenue they receive.

Trading Disadvantages

Risk

The key corresponding disadvantage of stock market trading, one wrong move can cost your entire capital amount and beyond, depending on whether or not your positions are leveraged. Managing risk as one of the key threats to your trading is an essential component of any effective trading strategy, and understanding from the off that markets can move heavily against you in the blink of an eye is crucial to success.

Knowledge

When you’re trading the markets, you’re effectively competing with the know-how, resources and intuition of professional traders and real experts. It is critical therefore that you develop the knowledge necessary to execute effective trades and interpret the way in which the markets are likely to move, which requires hard work, effort and a great deal of trial and error when you first start out.

Unpredictability

Markets aren’t always easy to read, and even the most experienced traders can get it horribly wrong. By their very nature markets are unpredictable, and can completely turn in an instant – otherwise, every single trader would be a multi-millionaire.

Read more on advantages and disadvantages of share trading.