An investment is an asset people buy with an expectation of a future financial return. There are different classes of investment that vary depending on the capital employed, the risk involved, and expected returns. Specifically people can choose to invest in bonds, stocks, or cash equivalents. Bonds are the least risky but also have the least returns. Stocks and cash equivalents or more risky and come with better returns. In general, each option has its advantages and disadvantages.
A stock is the top form of investment that an individual can consider. An investor chooses the company’s stock that they prefer from the stock market. Amadeo (2020) states that stocks have for a long time generated impressive returns to investors. Warren Buffet is a renowned billionaire who has generated much of his wealth through the stock market. Modern technology has simplified trading in the stock market so that a person can trade from the comfort of their home using a mobile phone or computer.
On the other hand, the stock market is precarious; investors can lose their entire investment within a very short time. Stock prices vary every day depending on either internal factors that affect activities within an organization or external factors that involve forces out of the control of the organization; such as politics, legal and economic changes, among others. Besides, investing in stocks is very emotional because of the fluctuating stock prices (Amadeo, 2020). Therefore, an investor has to be careful not to make rushed decisions in the stock market
Investing in the stock market requires an in-depth analysis of the company’s stock. This enables an investor to fully understand if there is a possibility of making sound financial returns. The investigation is conducted through a financial analysis; it involves the calculation of various ratios. The ratios are calculated to show the profitability, liquidity, solvency, or capital composition of the company.
Amadeo, K. (2020). Pros and cons of investing in stocks, plus ways to lower risk. The Balance.