Advantages & Disadvantages of Investing in Common Stocks

by M.C. Lee, Demand Media
    Common stocks are a form of business ownership.

    Common stocks are a form of business ownership.

    When you own a common stock, you own a piece of a larger business. For a young investor, this is a way to get a small piece of bigger action. But like any investment, there are advantages and disadvantages to common stock. Consider these pros and cons before making your own investment choices.

    Limited Liability

    One of the best advantages of commons stocks is that they allow you to invest in a business with only a limited liability. This is because your liability is limited to the amount of your investment. So if you invest $1,000 in a company, for example, that's the most you can lose. This is good news if your investment goes bad and the business ends up owing creditors a lot of money.

    Last to Get Paid

    An important disadvantage of common stock is that if the company is liquidated, you likely will not see a dime. This is because common stockholders are last in the pecking order. Bondholders, other debt holders and preferred stockholders must be paid what they are owed before money would be distributed to common stockholders. If there's nothing left — you're out of luck.

    High Potential Earning

    Common stocks have the advantage of offering a high earning potential. Compared to bonds or certificates of deposit, they provide a better opportunity to make a larger return on investment. These other investments are guaranteed, so you know the minimum and maximum amount that you stand to gain from them. However, common stocks have no limit. While this means that you may lose money, it also means that there is no limit to how much you can gain.

    Lack of Control

    A disadvantage of common stocks is that it can be difficult or impossible to exercise control over your investment. If you invest in your own business, you can make decisions about your strategy and business practices. When you invest in common stock, you are subjected to the will of other stockholders. The only way to gain control is to gain a majority share in the investment — an expensive proposition for most corporations.

    About the Author

    M.C. Lee is a successful business writer with expertise in general management and strategic management. Lee is also an active runner and marathoner who writes extensively on running and other sports.

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