Stocks: Advantages of owning a
stock
There is an old investment adage that says,
"The only people who really make money are the people who own
something." By investing in stocks, anyone with a few dollars can become an
owner of a piece of corporate America and perhaps make a good deal of money.
For every story of an investment gone sour, there are equal number of
success stories. Stocks are among the best long-term investments for most
Americans. The stock market offers a vary stable and reliable method of building
wealth long-term. This means stocks can potentially be top performers as a part
of your overall financial plan.
Stocks typically outperform all other
investment options over any ten year period, making them a must for your
long-term portfolio. Many fortunes have been made simply by purchasing a few
high quality stocks and holding them for several years. Except for a few short
periods, stocks have consistently outpaced the rate of inflation since World War
II. Inflation goes up and down, but stocks tend to continue to rise over time.
Stocks are excellent vehicles for retirement plans, especially those of younger
workers who have quite a few years left to work. You should concentrate on
buying stocks primarily when you're in your younger and middle working years.
Below are major benefits of owning a stock:
- Get share of the profit
- The importance of being a shareholder is that you are entitled to a
portion of the company’s profits and have a claim on assets. Profits
are sometimes paid out in the form of dividends
(especially for large companies like coca-cola).
The more shares you own, the larger the portion of the profits you get. Your
claim on assets is only relevant if a company goes
bankrupt.
In case of liquidation, you'll receive
what's left after all the creditors have been paid.
- Achieve Capital Gains - Most
small companies reinvest profits back into the company, so you may not receive
dividends, but the price of the stock will most likely go up if the company is
growing. Then you can sell the stock for profit. Microsoft, for example,
hasn't paid out any dividends until recently since it became public in the
early 1980's. But price of the stock has grown exponentially from a few cents
per share to around $24 (adjusted for splits).
Click here
to see the chart>
- No Dirty work to do -
The management of the company is hired by board of directors to run the
business.
Shareholders not being able to manage the company isn't too big a deal.
After all, the idea is that you don't want to have to work to make money,
right? But if the management is doing a poor job, shareholders can vote to have
the management removed--well, this is the theory anyway. In reality,
individual investors like you and I don't own enough shares to have a
material influence on the company. It's really the big boys like large
institutional investors and billionaire entrepreneurs who make the
decisions.
- Limited Liability - Another
extremely important feature of stock is that you are not be personally liable in the
case of the company not being able to pay its debts. Other type of ownership such as
sole proprietorship and
partnerships
are set up so that if the company goes bankrupt the creditors can come
after the partners (shareholders) personally and sell of their house, car,
furniture, etc. Owning stock means that, no matter what, even if a company of which you
are a shareholder goes bankrupt, you can never lose your personal assets.
- Better success rate - If you
were to start your own business, the likely hood of you succeeding is very
slim. You can sleep better when you own shares in a successful company like
Altria Corp (formerly Phillip Morris). What are the chances of Altria going
out of business? Not likely, can it happen? Sure! if people stop smoking, stop
eating cheese and stop washing their clothes and utensils. Altria makes almost
every consumable products imaginable. So, they are going to make money every
time people smoke, cook, clean and wash dishes, etc.
- Tax Deductibility - Unlike
gambling in a casino or a racetrack, if you experience any loss with a stock,
you can take a write off against your regular income. Off course, losing money
is not a benefit but if you are in a high tax bracket and your combine federal
and state tax is around 40%, then being able to deduct losses on your income
tax is great. Let's assume you have a loss of $5,000, you can deduct $3,000
(current yearly limit on deducting against ordinary income) of it on the year
you incurred loss on your tax return (saving you $1,200 in taxes) and carry
over the $2,000 loss on to next year's tax return (saving you another $800 in
taxes) for a total savings of $2,000 in taxes.
Avoiding Capital Gains Tax...
Another advantage of long-term investing in stocks comes from avoiding
unnecessary taxes. Whenever you sell a stock at a higher price than you
purchased it, you must pay a capital gains tax on the profit. There are
different rates for capital gains based on how long you owned the stock. Under
current tax regulations, if you own a stock for less than a year, your capital
gains tax rate will be the same as your federal tax bracket -- if you are in the
28% tax bracket, your short-term capital gains tax rate is also 28%.
However, if you hold a stock for longer than a year before selling, your capital
gains tax rate is 20% -- which is less than the short-term rate for most
investors. Investors in the lowest federal tax bracket, the 15% bracket, pay a
10% long-term capital gains tax. And if you hold a stock that you bought in 2001
or later for five years or longer, you become eligible for a special tax rate of
18% (or 8% if you're in the 15% bracket). [Of course, the full tax regulations
are much more complicated than this. You should consult your personal tax
advisor regarding your own situation.]
While all this talk about percentages and tax brackets can be confusing, the
most important thing to remember is that taxes can significantly reduce your
portfolio's overall returns. If you trade stocks frequently, even if you are
able to do so profitably, capital gains taxes can take a big bite out of your
returns. In fact, academic research has demonstrated that frequent traders are
often less successful with their portfolios than long-term investors, due to the
effects of taxes and commissions. Constantly buying and selling stocks can be
great for your broker and accountant, but it's unlikely to fatten your
portfolio.
Next-->>
Disadvantages of owning a stock
The easiest way for
your children to learn about money
is for you not to have any.
--
Katharine Whitehorn --
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