Stock Market Investment in the US

Stock Market Investment in the US

Introduction

A stock market is one of the most crucial factors in the economy of a country since it is a determinant of the market valuation of companies and organizations. Basically, stock markets refer to public markets used for the exchange of stock, that is, the issuance, buying, and selling of stocks on an open stock exchange or over the counter. Stocks, on the other hand, are the fractional ownership of companies and organizations, and hence stock markets are places or platforms where investors can sell or acquire fractional ownership of companies. Stock markets are, therefore, referred to as equity markets since stocks represent the equity of companies. Countries that have efficient and function stock markets boast of stable economies since the stock markets enable companies and organizations to obtain capital from the public easily hence igniting investments that lead to the progressive and strategic economic growth. Stock markets serve two main purposes in an economy. The primary purpose of stock markets is to avail of a platform for companies to obtain capital for expansion from the public. When companies list their shares for sale, they obtain capital and avoid sinking into debts through borrowing money for expansion. The secondary purpose of stock markets is to enable the citizens of a country or investors to make notable investments and thus share in the lucrative profits of public corporations within the country. Due to the benefits associated with stock markets, countries are encouraging investors and various citizens to invest in stock markets. However, there are multiple limitations and risks associated with investing in stock markets that an investor ought to comprehend before venturing into stock markets. Investment in stock markets without a proper apprehension of these concepts may lead to multiple losses by an investor. This report shall, therefore, explore some of the benefits, limitations, and risks associated with making investments in the stock markets of the United States.

Benefits of Investing in the US Stock Market

Gaining Ownership of a Company

The economy of the United States is one of the most stable economies in the globe is awash with companies in every sector of the economy ranging from the transport and logistics sector, the banking sector, the agricultural sector, and the information and technology sector among others. According to Sarwar & Khan (2017), the economy of the United States is such it provides a conducive environment for the exponential growth of established companies as compared to small businesses. Due to the lucrative nature associated with companies in the United States, a survey conducted in 2018 showed that forty percent of working Americans desired to get ownership of companies and would even quit their jobs if that would happen. Investing in stock by buying the shares of a company gives one the opportunity to gain ownership of a company and hence enjoy the multiple benefits associated with being a company owner (Akyol et al., 2017).  Once a person is a shareholder, they have the right to influence and managing the operations of a company hence giving one the rare opportunity of being part of the success of a company. Company shareholders enjoy benefits like voting on the corporate board members and critical business decisions. For Instance, if a company wants to acquire another company, the decision rests on the shoulders of the shareholders (Chen et al., 2016). Being a partial company owner also guarantees one access to the annual reports of the company enabling a person to learn more about the company. Further still, one may decide to invest in the shares of stock of their employer company hence reinforcing their commitment to the success of the company. Such a show of loyalty can come along with a raft of benefits to the development of one’s career.

Dividend Income

Investing in stock markets in the United States enables an investor to earn extra income in the form of dividends. Dividend Incomes offer financial relief to investors by widening their sources of Income (Li et al., 2020). The repulsive effect in improving one’s living standards. However, not all stocks in the United States offer dividends to investors. The New York Stock exchange market, one of the largest stock markets in the world, provides a list of companies whose stock offer dividends to aid investors in making wise investment decisions (Akyol et al., 2017).  Companies whose stock offers dividends make annual payments to their investors. These dividends have one major advantage in that they arrive in even of the particular stock that one invested in has lost value. Further still, the dividends are not part of the profits that accrue the sale of the stock (Chen et al., 2016). These two factors associated with dividends make stock markets Investment a lucrative venture for various persons seeking to the progressive growth of their wealth and income.

Diversification of Investments

The stock market of the United States is awash with companies from all the sectors of the economy like the health sector, the transports and logistics sector, the hospitality sector, the Insurance sector, the banking sector, the agricultural sector, Information sector, building and construction sector the manufacturing sector and the Technology sector among others. These sectors have different stakes in the economy of the US and hence different stabilities (Alquraan et al., 2016). From a survey done in the year 2010, the health care, technology and construction sectors were the major contributors to the economy of the United States. After the financial crisis of 2008, these sectors played a critical in the resuscitation of the economy of the country by creating over six million new jobs. One can therefore make diversified investments in these different sectors hence spreading the risks of their investments. Diversified investments are safe since it is unlikely that all industries shall suffer setbacks at the same time. Therefore, when the logistics industry is facing setbacks, one’s Investment in the construction industry can still save them (Li et al., 2020). The investments in diversified stock also change value independent of other types of Investment that a person many have ventured into like government bonds and real estate.

Get value from the sale of stock.

Stocks, one bought, can earn an investor income in two major ways. Investors, once they have bought stock, do not engage in the day to day running of the companies whose stock they have purchased. It is upon the management of the companies to ensure that the shareholders get a return in the invested capital by strategically running the companies to ensure that targets set are met with specified time frames (Alquraan et al., 2016). Investors, therefore, have to do thorough background research of companies before buying their stock to ensure that they only purchase stock from companies whose growth is guaranteed. Investors, therefore, buy a stock when they are trading at low prices and sell them later at higher prices (Lee et al., 2019). These types of investors are referred to as buy-and-hold investors, which is characterized by patience. After purchasing stock at a low price, one has to exercise patience, the stock of a company grows over time. Once the stock has grown and is then trading at good prices in the stock exchange market, the investor decides to sell the stock, thereby making profits from the sale (Qiu & Wang, 2018).  The benefits are, however, high when on sells larger shores as compared to smaller shares whose profits may just be a drop in the ocean.

Invest in Global Markets

Stock markets give investors the rare opportunity of investing in companies whose services and operations cut across the globe. The stock exchange market of the United States allows foreign companies to list with it after meeting all the requirements attached. When these foreign companies list with the stock exchange market of the United States, they follow all the rules and regulations that other domestic companies follow. Further still, they are exceptional rules that they are expected to follow to ensure that investments made by the citizens of the United States are safe and secure. Some of the non-US companies listed on the stock market of the US are the Toyota Corporation, Sony Corporation, Mitsubishi, Honda company, and many other multinational corporations whose services cut across many nations across the globe (Alquraan et al., 2016). An investor can, therefore, purchase the shares of these companies and hence investing in global markets. By investing in global markets, an investor can exploit the lucrative opportunities in other parts of the globe and share in the expansion of these multinational corporations. Investment in global markets is a lucrative venture since many multinational corporations, being backed by diversity, experience exponential, and fast growth, thus ensuring that the valuation of its shares increases over short periods.

Gaining Partnership of Businesses that you Love

There are industries with companies that perform exceptionally well in all dynamics ranging from their revenue, their principles, work environment, sustainability schemes, and Corporate Social Responsibility Schemes (Chen et al., 2016). These companies are the dream companies of many people across the globe. Working in some of these companies is an indicator of success due to the competitive nature of the selection process applied at the recruitment level. Companies like Facebook, Google, Twitter, Cisco, and Hilton have many times been ranked as some of the best companies to work for in the United States owing to their explicit terms of work. However, the best companies to work vary from one industry to another. Students in schools of computing taking IT-related courses and those in engineering fields yearn to be part of companies like Tesla that is determined to revolutionize the automobile sector (Lee et al., 2019). Top-notch innovations from these companies, coupled with their good revenues, leave many individuals salivating to work in these companies. However, not everyone may get the sublime opportunity to be part of these companies. Stocks, therefore, gives one an opportunity to share in the success, development, vision, and mission of these companies (Paramati et al., 2016). When one purchases the shares of a company like Tesla, they will have the entitlement of being part of the explicit innovations of the company and hence gaining some self-satisfaction.

Limitations of Investing in Stock Markets

Risk of Losing Investment

One of the major setbacks associated with stock market investments is the risk of losing their investments. Many people have shunned investing in stock markets for fear of losing their investments. However, just like any other investment, the Investment may go berserk, therefore leading to multiple losses (Lee et al., 2019). Buying stock means gaining fractional ownership of a company and hence if the company is declared bankrupt, one loses their investments. Shareholders can do nothing if a company is declared since they are the owners of the company. The United States however gives tax reliefs to those who lose their stock investments when their companies are declared bankrupt. Many companies that had been performing well, due some technical challenges and mistakes have lost traction of their markets and gone under receivership and later declared bankrupt. In the United States shareholders are usually the last people to receive any proceeds of the company after a company has been declared bankrupt. First priority is given to customers and suppliers (Paramati et al., 2016). This means that in most cases, investors totally get nothing. A large corporation like General Motors, one of the top automobiles was declared bankrupt in the year 2009. All its shareholders were subjected to heavy losses and would later breathe a sigh of relief when the company filed for recovery.

High Volatility

Volatility refers to the variation in the price of stock or the shares of companies. Investors who make investments in stock markets are always subjected to volatility due to the variation in the market (Chuluun, 2017).  Stock markets experience high rates of volatility due to the competitive nature of the market. At one time, the stock of a company may be highly valued and at another timer, the stock of the said company may go down in valuation. It is for these reasons that stock investors are encouraged to do a proper and adequate background search of companies before buying their shares of stock. Companies with efficient management do not experience high volatility in terms of their stock. Their stocks are instead stable on the stock market and have an upward trend of gaining value over time. Volatility experiencing an upward trend means that the valuation of a company is increasing hence increase in the profits made by the investor. Most investors sell their stocks during upward volatility raking in profits (Tsai, 2017). However, investors are subjected to multiple losses during the downward volatility since the stocks lose value. A good example is during the financial crisis of 2008 when the market valuation of the United States dropped by at least fifty per cent. The downward volatility during this period subjected many investors to unimaginable losses.

Availability of Many Options

The availability of too many options is one factor that discourages many people from making investments in stock markets. The stock market of United States has over two thousand companies listed with it and over seven thousand stock from which an investor can chose (Chen et al., 2016). These stocks also have varying performance in the stock market hence the need for an investor to choose wisely. At this point, most investors, having been presented with many options get confused on what stocks to buy. An investor is therefore subjected to rigorous research and analysis of the market that consume a lot of time (Tsai, 2017).  One has to do background checks of multiple companies to determine their potency of growth before making a decision od buying their stock. While doing this kind of research, an investor faces multiple changes like restricted access to information on some companies or unavailability of appropriate information that can be used to make effective decisions. With all these complications in place, an investor may fail to make the right decision or completely shy off from purchasing stock.

Risks Associated with Investing in Stock Markets

Economic risk

Investing in stock markets is a gamble that only seasoned investors take the risk. This is evident with the occurrences of 2000 and 2008 when an economic crisis was felt all over America. In 2000, there was a crisis as a result of the overpricing of stocks and the market bubble. In the event of such only, the investors bear the brunt of the damage (Alquraan et al., 2016). Their Investment deteriorates as this was the case with many tech companies during the time of the crisis. The market bubble was caused by factors that were not anticipated at that time. Firstly, the employment of parameters that ignore revenue generation. Interest was only placed on business and the money they made but not on how this money was produced and the underlying factors of production; one theorized scenario was on the nodes connected on a computer network, perhaps the internet (Chen et al., 2016). The greatest fallacy made was that the worth of a system was on the number of nodes. Therefore, as the number of devices grew, the more valued a company becomes. Ironically, it was since had the company been valued on the amount of money generated then the crisis could be averted. A study by the world’s largest bank HSBC holdings postulates that new tech companies were overvalued by almost 50 percent. They were thereby making these companies lucrative for unsuspecting investors. Even at the moment, there are speculations that tech companies might cause another economic fall out because of how they have been overvalued, for example, Facebook is currently thought to be worth almost around a hundred billion dollars this might not be the correct figures since the valuation is not benchmarked on future and current income (Chuluun, 2017). For anyone investing in stocks should have learned from history. The stock valuations are imaginary, and one might lose their investments as the economy is unstable. Future investors should be hopeful that the economy becomes solid and invest in highly valued companies with good annual returns (Tsai, 2017). Globalization has also made it more accessible as one can invest in companies away from home, therefore once can consider investing in foreign stocks. Portfolio diversification is essential, especially when the stocks come crushing, one can diversify by investing in bonds and fixed income securities.

Inflationary risk

When the economy worsens, inflation kicks in, and it affects everyone. The majority who feel the effect are those who have invested in fixed incomes. Inflations create economic slumps and damages value in an economy (Tsai, 2017). Many are oblivious about inflation and make assumptions that it is always in control, the peaking interest rates are even dangerous than the problem itself, governments borrow to fund development projects, other to support economic resuscitation programs such incentives only prepare the return of inflation. Businessmen indeed are men of tact and vigour, just in time, they always shift to more stable investment packages able to resist inflation, the hard assets favoured include real estates and precious metals like diamonds and gold. The economy hurts fixed incomes as it deteriorates their values. The best remedy to inflation is a stock investment because companies are able to make rectifications on price. Massive global recessions may mean that the stocks would be hurt, but this would only be for some short time as they would bounce back and adapt to the situation. Another aspect of inflation is that when it swings in the purchasing power reduces making the costs of commodities high. The prices of stocks are also affected during booms; they reduce drastically, the dividend-paying stocks making investors without their expected returns (Tsai, 2017). The direct effect on stocks is that it affects share differently; the value stocks perform well during high inflation whilst the growth stocks do better during low inflation. This creates a scenario where a potential investor should carefully analyse before determining the kind of capital to invest in.

Market value risks

Market value risk is the situation where the market-society rejects your Investment. This happens when investors chase after hyped up companies abandoning stable and good companies (Khatri & Srivastava, 2016). The phenomenon occurs when both good and bad stocks suffer as investors crash out of the market. Tactical investors view this as a time to restock as the values of these good companies drop massively. An example of such an investor was Warren Buffet when he invested in Starbucks, yet it wasn’t the favourite at that particular time. It is not wise for one to invest in only one section of the economy, by diversifying investment one creates better chances of growing your stocks at one particular time (Khatri & Srivastava, 2016). Market risk is championed by a different factor, including threats that currency would either rise or drop; another factor is the share price speculation. Shares are speculated to either rise or drop. The only solution investors have to avoid the brunt of market risk is to diversify into different markets as possible. This would weigh down the effect of systematic risk.

Risk of being too conservative

Careful Investment is an attribute that is hard to acquire. Most investors rush to invest without thorough considerations on which company to buy stock and the amount of capital to purchase (Akyol et al., 2017).  However, being over too conservative is a risk of achieving returns for investments. One of the critical attributes of entrepreneurs is their willingness to risk. Risk your money in that company that everyone thinks might be falling, you might win opinion bet. Investing in well-established companies is good for security of purchase, with such companies expect little dividends for your stock, on the other hand, investing in a company that might be struggling is not appealing, but in the long run, the return for Investment is vast as compared to the other highly valued companies (Khatri & Srivastava, 2016). When an economy comes out of a recess, investors will tend to shy away from investing in the affected sectors. Research has it that they will move to those sectors that were unaffected (Pittman et al., 2019). Unfortunately, such moves only create similar problems like market value risk, and investors decide to invest is bound on experience as a reason, for an investor who has a keen interest in agriculture and has invested in stocks from companies dealing in agriculture a slight upheaval in that sector would make such an investor think twice whether to keep investing or opt to another field  (Khatri & Srivastava, 2016).  Experiences good or lousy influence the choices made by the investors. And this affects stock investment in the United States (Chen et al., 2016). A group that has been so conservative to invest in the elderly and those about to retire, they see stocks as a gamble and only buy shares in stable companies. Portfolio aggressiveness is suitable for young investors as this acts as a cushion for the negative actualities in an investment like market crashes. Investors are motivated to diversify and not put all their eggs in one basket.

Liquidity risk

Potential investors fear the inability to sell one’s stocks to avoid losses. An excellent way to avoid this risk is by diversifying (Pittman et al., 2019). When an investor expands, he/she reduces the chances of making losses or losing their Investment. Ideally, if one performs very poorly, there is a potential of other investments being at their record best. Investments experts advise that it is never wise to put all your Investment in one avenue. Furthermore, investors can minimize this risk by index investing (Weckman et al., 2020). All investments share the brunt of the risk; this is done by tracking a particular index. Exchange-Traded Funds (ETF) such as (SPY), the Vanguard Total Stock Market give this advantage.

Legislative Risk

The legislative risk is the relationship between the state and businesses. Investors should think straight when investing in overregulated corporations, as this affects the overall return for a stock investment (Akyol et al., 2017).  The government comes with new regulations like antitrust legislation, the addition of taxes, and these risks are different for specific industries. According to the McLaughlin list, the petroleum industry and other manufacturing businesses are mostly regulated compared to sectors like transport (Chuluun, 2017). These investments face a plethora of regulations in terms of how they handle data, and their revenues are highly taxed, thereby reducing their overall output. For potential investors, they should look keenly and diversify as this might be the only solution available first hand (Alquraan et al., 2016). In capital economies like the United States, the government keeps a keen eye to avoid consumer exploitation in these trivial industries. This clearly makes dividends on the stock to be little in comparison to other sectors like transport where there are considerably few regulations. Governments regulate some of these essential sectors to create legitimacy in the face of the public. In some instances, these industries are the key sources of government revenue; therefore, without regulations, governments might lose key stakes in their public finance (Chen et al., 2016). This might lead to an inability to provide essential state and government services. The legislative risk might be unknown to an investor who doesn’t research the industry to invest, thereby leading to a fixation of income. It, therefore, becomes vital before acquiring stock to do a background study and search to determine whether the risks match the potential revenue.

Conclusion

Investing in stock markets is one of the best investments that a person can make in the United States due to the multiple benefits associated with this type of Investment. The core benefit of Investing in stock markets by purchasing the shares of companies in the attached financial benefits. An investor can make income from their stock through dividends, which are accrued benefits that companies pay shareholders annually or through the sale of stock for the buy-and-hold shareholders. The buy-and-hold shareholders purchase stock when it is lowly valued and sell it at a later date when its valuation increases, thus raking in profits. Through the purchase of stock, an investor also gets the rare opportunity of gaining ownership of a company and being part of the companies that they so admire. However, it is paramount that an investor apprehends the associated risks and limitations of investing in stock markets before daring to stake their money. One of the major limitations of investing in stock markets is the high volatility of stocks in which the prices of stocks vary from time to time. A downward variation may, therefore, lead to the loss of Investment by an investor. The associated risks also a major set back pegged n stock market investment. Some of the risks are an economic risk, inflationary risk, market risk, legislative risk, and liquidity risk, among others. Comprehension of all these factors is central to making a worthy investment in stock markets.

References

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