12, Nov
Should You Invest In Stocks Or Bitcoin?
Stocks and cryptocurrencies are dramatically different investment assets. While both are generally liquid assets that belong in the speculative side of your portfolio, the similarities end there. These are very different types of securities and belong in very different parts of your portfolio. Here’s a summary of these two types of securities. A financial advisor can help you decide on the best investment choices for your portfolio.
What Are Stocks?
Stocks represent ownership in a publicly traded company. Each share of stock you buy confers a percentage of ownership in the company. You receive this ownership in proportion to the number of shares that a company has issued.
For example, say that XYZ Corp. releases 50% of its ownership in the form of 50 shares of stock. If you buy one of these shares of stock you will literally own 1% of XYZ Corp. (While uncommon, when a company has released more than half of its ownership in the form of stock, it is possible to acquire the firm simply by purchasing enough of its stock.)
An investor can make money by selling their stock shares to other investors. This is known as capital gains, the difference between what you paid for the asset and what you get from selling it. Beyond that, the benefits you get from owning stock depend entirely on the company involved. Stocks can also gain value by paying dividends to their investors, through voting power held by shareholders and by other rights of ownership. Every individual company is different in terms of how (or if) it handles issues like dividends and shareholder voting rights.
Pros and Cons of Investing in Stocks
Investing in stocks is a popular way to build wealth and achieve financial goals. However, like any investment, it comes with its own set of advantages and disadvantages. Understanding these can help you make informed decisions about whether stock investing aligns with your financial strategy.
Pros of Investing in Stocks
Potential for high returns: Stocks have historically provided higher returns compared to other investment vehicles like bonds or savings accounts. This growth potential can significantly increase your wealth over time, especially with a long-term investment horizon.
Ownership and dividends: When you buy stocks, you gain partial ownership in a company, which can entitle you to dividends. Dividends are a portion of a company’s earnings distributed to shareholders, providing a source of passive income.
Liquidity: Stocks are generally considered liquid assets, meaning they can be quickly bought or sold in the market. This liquidity allows investors to access their money relatively easily compared to other investments like real estate.
Cons of Investing in Stocks
Market volatility: Stock prices can fluctuate widely due to market conditions, economic factors, or company performance. This volatility can lead to significant short-term losses, which may be unsettling for risk-averse investors.
Complexity and risk: Investing in stocks requires a good understanding of the market and individual companies. Without proper research and knowledge, investors may face the risk of poor investment choices and potential losses.
Emotional decision-making: The ups and downs of the stock market can lead to emotional decision-making, such as panic selling during downturns. This behavior can negatively impact long-term investment success.
Investing in stocks offers both opportunities and challenges. By weighing the pros and cons, you can determine if stock investing fits your financial goals and risk tolerance. Remember, a well-informed approach and a diversified portfolio can help mitigate risks and enhance your investment experience.
What Are Cryptocurrencies?
A cryptocurrency is a purely digital asset. This means that it has no physical component but rather exists only as entries in an online ledger recording ownership. This is, for example as opposed to the U.S. dollar which has both a physical component (you can withdraw and hold a dollar bill) and a digital component (you can own a dollar as nothing more than an entry in your bank account recording that ownership). The individual unit of a cryptocurrency is called a token, in the same way that the individual unit of a stock is called a share.
Cryptocurrencies come in two main varieties. Some, like the well-known Bitcoin, are intended as pure currencies. They exist only for people to trade, buy and sell. Others, like Ethereum, are what is known as “utility tokens.” These currencies function as part of a more complex piece of software, although utility tokens are also meant to be bought, sold and traded.
At the time of writing, there are several thousand different cryptocurrencies in circulation.
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