Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

The advantages and disadvantages of investing

Learning to invest is a good skill to have as there can be many advantages/benefits, including the ability to build wealth over the years with little time commitment. In this guide, we highlight some advantages of investing as well as the disadvantages/drawbacks of investing, plus how to get started and alternatives if the idea of traditional investing doesn’t appeal to you.

What are the advantages of investing?

Investing is buying stocks and other assets and holding them for the long term. A long-term investment horizon often uses a passive investment strategy​, meaning there is little active buying and selling (trading) happening. However, some investors may choose to enter and exit positions every few years or when their investing strategies​ tell them to do so.

In either case, here are some advantages of investing.

Stock markets typically rise over the long term

The stock market has historically risen over the long term at a greater rate than inflation. Therefore, investing in stocks not only offers the chance to protect capital from inflation but to increase wealth, over time, as well.

Long-term average returns for the S&P 500 index have been around 10% per year, and for the FTSE 100, near 7.5% per year (accounting for dividends reinvested). Learn about the best long-term stocks​ to watch.

Please note that past performance is not a reliable indicator of future results.

Little time commitment

Investors who own stock indices or index ETFs have little work to do. By being invested in an index, the market does the work for them. Investors just hold the positions for the long term to achieve market average returns.

A savings plan that grows

Investing is like saving, but funds can grow at a much higher rate than most savings accounts offer. Most investors opt to save for retirement and/or for future expenses. While some emergency cash can be kept in a saving account, many investors opt to put a large proportion of their savings into investments that earn a greater rate of return.

Investing is not limited to stocks

Investing provides options. While stocks are a common investment, so are bonds, ETFs, real estate investment trusts (REITs), and precious metals. Bonds issued by stable companies or governments tend to have less volatility than stocks but also have lower long-term returns. That said, they often offer returns that are higher than a savings account. Therefore, even if stocks have little appeal to you, there are other options for investment.

The long-term return on stable government bonds is between 5% and 6%, while stable corporate bond yields are slightly higher.

Less tax

Long-term investments are typically treated more favourably in terms of taxes than short-term trades. There are also certain investment accounts that may further protect investment gains from taxes, such as a stocks and shares ISA.

Investments can provide income

Whether it’s now or later, investing can provide regular income from dividends (stocks) or interest (bonds). When a bond or dividend-paying stock is purchased, it pays a certain percentage to you at regular intervals. This income stream can be reinvested to take advantage of compounding returns or used for something else.

Investing is flexible

Investing is not a one-size-fits-all process. Investors choose how to invest in stocks​ and which stocks or ETFs they want to own. An investor chooses an asset allocation that is based on their risk tolerance — for example, holding more stocks for higher returns or holding more bonds to reduce volatility in the portfolio.

What are the disadvantages of investing?

Here we’ll look at some potential disadvantages of investing, as well as how it compares to some other forms of trading.

Possibility of loss

When investing, there is a possibility of loss. While major stock indices, such as the S&P 500 and FTSE 100, have risen over long periods of time, there are no guarantees that the market will rise during a specific investor’s time horizon.

Compounding is slow

Investing doesn’t compound capital as quickly as successful short-term trading does. Therefore, all else being equal, a good investor will make lower returns than a good day trader or swing trader.

Investing isn’t active (if you want that)

Investing is generally passive, with trades lasting long periods of time and little active buying and selling. This may not appeal to investors who like doing lots of research and being active in the market. That said, there is always the option to be active in the market but also have some funds invested as well.

Opportunity cost

When we invest, we are giving up the use of that capital in exchange for potential earnings over the long run. An investor could be using that capital for something else. For example, we might use it to redo our house, take a vacation, go back to school, or start a business (some of these are alternative forms of investment). But ultimately, if we allocate capital to investing, it can’t be used for something else, at least not while it is invested.

Consider this before investing. Investing sees the greatest benefit when funds are left in the account to compound over time. If we are constantly pulling out funds from our investment account to use on other things, many of the benefits of investing may be lost.

How can I get started?

  1. Consider making an investment plan. This will include things like whether you prefer to invest in lower-risk or higher-risk assets and how long you have till retirement/whether you need the funds.
  2. Decide on a portfolio allocation. When you start out, your investment portfolio may just be composed of one or two index ETFs. That is fine. However, over time, you may want to expand this and allocate a certain percentage of your funds to bonds or other assets as well.
  3. Pick an investment strategy. Again, this can take place over time. Do you prefer just buying index ETFs, or do you want to buy individual stocks? If you purchase individual stocks, how will you determine what to buy and when? Some common approaches to consider include value investing, growth investing, or passive investing (buy and hold).
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What are the alternatives to investing?

The main alternative to investing in common assets like stocks or bonds is to trade. Trading is buying and selling stocks for profit as the price fluctuates. There are two common forms of short-term trading:

  • Day trading, which is buying and selling an asset (stock, currency pair, ETF, or forward contract) within one day, and potentially buying and selling it many times before the end of the day’s trading.

  • Swing trading, which is taking positions that last several days to several months.

Alternative investments are another option instead of stocks and bonds. Alternative investing includes real estate, investing in businesses directly (venture capital), starting a business, or any action that can replace the returns or income that investing would have provided.

FAQs

How do I know if investing is for me?

Start out small. You could purchase an index ETF or blue-chip stock using an amount of capital that is affordable to you. Monitor how you feel. If you enjoy the process, consider allocating more capital to invest. If you don’t enjoy it, perhaps you’ve invested too much or have chosen something too volatile (or stable) for your preferences, so you can adjust as needed.

How can I pick the right investments?

There is no right investment for everyone. Some people want to own volatile stocks to potentially capture higher returns, and they are willing to take on the risk of losing. Others are risk-averse and prefer very stable stocks or bonds. By going through the steps to get started in investing (as outlined above), you will gain knowledge and a better understanding of the correct investments for you. Learn some investment strategies to start.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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