The Advantages of Holding Stocks
A share of stock represents an ownership interest in a business. Companies issue stock as a means of raising capital, the funds needed to run and expand the business. Although stock markets experience ups and downs, stocks are the only investment that allow you to participate fully in the growth and profitability of a business while taking limited risk.
Capital Appreciation
Because it has the potential for capital appreciation, common stock offers the greatest opportunity for investors to earn yields that exceed almost every other type of investment, according to Investopedia, part of Forbes Digital. Capital appreciation is growth in the stock's market value over the price an investor paid for it. The stock's value is determined by the price an individual is willing to pay to own it.
If you buy and hold stock in a company that performs well and expects strong future earnings, the value of that stock will increase because investors will pay a higher price for the opportunity to benefit from those earnings.
Dividends
Dividends offer stockholders the ability to share in a company's profitability, because they are a return on investment in the form of a cash payment or the issuance of additional shares of stock. They're so attractive that many investors seek out and invest only in companies that pay regular dividends.
Liquidity
Another advantage of holding stock as opposed to other investments is liquidity. Most stock is traded in an open market, meaning that a large number of investors are available to purchase the stock you hold. The bigger the market your stock is traded on, the more investors who can bid for your stock, and the greater chance you have of selling your stock when you choose to do so. This ease of selling is called liquidity. CDs and bonds are examples of instruments that aren't as liquid as stocks.
Voting Rights
Most stocks have some right to vote on the members of the company's board of directors, the people who make decisions about the company's direction and use its resources. Stockholders might also have rights to vote on other decisions important to the business. Voting rights are an advantage not offered to investors who buy corporate bonds. As a shareholder, you can influence the company's direction by exercising your right to vote.
Limited Liability
Stockholders are considered passive owners, those who do not participate in the ongoing running of the company. Therefore, their legal liability for actions taken by the company is limited to their investment, which is an advantage over those who participate directly in the running of the company. If a company commits an illegal act, stockholders may suffer a decline in their stock's value, but they can lose no more than the original price they paid for the stock.
Tax Advantages
If you hold stocks for more than one year before selling them, any profit is subject to capital-gains tax rates, which are lower than ordinary income tax rates. Profits from stocks held for less than a year are subject to ordinary income tax rates.
