In the argument of either an investor to invest in a stock of a given company or not is really a controversial issue, in which an investor has to make a choice between a range of assets that ca be held in place of stock. The investor’s decision to invest in a certain asset, where stock is an example of assets involves a rational consideration of various assets depending on the assets’ risk in investing in them and also the returns of respective assets. The other investment opportunities other than stock include holding of bank accounts that bear interest rate, investing in capital good which are certain to bear interests, and also investing in appreciating assets like land among other assets. In quite a quick look, investing in stock might seem to be a good investment, but in the real sense it’s never true as it is vulnerable to many externalities which are certain to make it a risky investment despite its returns. The term risk is used in the essay to explain the tendency of the true value of the stock fluctuating from the expected future values of stock, therefore it can be perceived as a measure for accurate predicting of the stock value in the future.
The papers will try to look at these hidden risks that are inherent in stocks as a choice of investment. The paper also considers the opportunity cost, that is the benefits that are forgone by investing in stock which could have been attained by investing in the alternative assets implying returns analysis before making a choice. The paper starts from the analysis of the factors which influence the investors to invest in stock and mainly on the factors which influence expectations, because investors normally invest in stock expecting that their values will rise in the near future to either earn increased dividends or sell the stock held at a profits, and later the paper looks at some other factors including monetary policy and government policies among other factors which are certain to influence the stock values of various companies.
Investors are always in consideration of various investment opportunities that are at their reach, where they tend to invest in opportunities that are more rewarding compared to the others and also considering the risk inherent in these various investment opportunities. The investment opportunity taken by an investor depends so much on the returns of the investments and the risks, but on matters of considering risk as a factor of determining the kind of investment opportunity adapted, it varies from one investor to the other depending on whether the investor is risk averse, risk neutral or risk loving. Risk averse investors do not invest in opportunities where there are risks, the risk neutral investors invest in any opportunity without considering the risks inherent in the opportunity in as far as it hits his or her returns target and the risk loving investors normally invest in opportunities with a lot of risk assuming the assumption that the greater risks the more the returns (Sincere, 25). This is the condition that determines the pattern of distribution of investors in a varied range of investment opportunities, as an investment that is perceived as being unwise to invest in is taken up by another investor who looks at the other one as being bogus, Therefore investors try to follow their investment guidelines in choosing the appropriate investment opportunity from a portfolio of investment opportunities.
Investing in stock by investors in a given company, normally provides the investors a share of ownership of the company, thus enabling them to influence in decision making, sharing of profits in the form of dividends and also they restore a right of voting in the company in them choosing the kind of leadership that they need. However the above factors vary from one type of stock to the other, depending on the various conditions that are attached to various types of stocks. There are two main types of stock and they include the common stock and preferred stock. The investors who hold common stock have a voting right in choosing the board of the company, where one vote is equal to one share and they actively participate in decision making plus overseeing the decisions that are made by the management, while in the case of preference stock holders of the company are only entitled to the dividends out of the company’s profits and they do not have a voting right or ability to influence decision making in the company. The preferred share holders may seem to be disadvantaged by not having a voting right and participating in decision making, but they rather champion the common stock holding in sense that they are guaranteed a fixed dividend regardless the level of performance of the company and also the preferred stock holders are first paid off in case of liquidation of the company, however the company has the powers to purchase the preferred shares for various reasons, thus laying off the preferred stock holders with much easy from benefiting from the company’s profitability ( http://www.investopedia.com/university/stocks/stocks2.asp ).
The major reason why individuals and co-operate institutions invest in stocks is to earn returns from the funds that they invest in stocks. The trend of investing in a certain stock depends on the expectations of the investors than any other factor, in the sense that if they expect a rise in the stock value, then they are likely to purchase the stocks at the current times and hoping to sell them at a profit in the near future, and if they expect the value of the stock to fall in the near future then they will sell the stock at the current times at its market value before they fall in price, which will subject them to losses. Therefore the stock market transactions are mainly determined by the investors’ expectations.
Expectations are not certain to be the true situations, thus it comes with some level of risk, and thus investment in stocks normally goes with some risk. The investors consider the risks that are inherent in various stocks that they intend to invest in before sealing the transactions. The risk that comes with investing in certain stock is the likelihood that the values of stock might vary extremely opposite to the expectations of the investors, and more especially in the state where the value of the value of the stock is likely to decrease extremely beyond the expectation, exposing the investors to the risk of making losses (Bain and Gennard 229) The investors are left in dilemma of choosing on either to invest in stocks or in other assets other than stocks. The alternative for investing other than stock can be investing in tangible assets like land and any other property that can be owned by the investor for future sale, in him expecting that the prices of the assets that he is holding at the current time will rise in the near future.
The investors expectations are always influenced by various factors, where the factors include the profitability level of the firm in which the investors are to invest, the price trend of the stock over a period of time, reputability of the firm, the size of the firm, also loyalty to some company’s management team, the company’s strategic plans, and also the competitiveness of the company in one given industry.
In a close look at the factors that determine expectations, it can be deduced that these factors are in some degree unreasonable because they are out of control of the investors. For instance, using the profitability level of the company as a measure in evaluating the risks involved in investing in that company is invalid, because the company’s profitability at the current times has got nothing to do with its future profitability as some of the factors that favored its profitability are naturally given, thus there availability in the future is uncertain in ensuring the same level of performance (Malkiel, 134). Performance of the company is determines by a combination of factors ranging from the ones under its control to the ones that are out of its control, thus not certain to predict accurately on how the future will be, on an assumption that investors normally invest in aiming to earn dividends in the near future. However this limitation of using profitability of the company as an incentive to invest in the stocks of the company can be overcome by investors investing in preferred shared so as to enjoy fixed dividends in minimizing the risks, but this is not all enough because the preferred stocks are subject to be purchased by the company at their wish hence the dividends are not certain to flow in the future as expected.
At number of investors normally analyze the price change trend of various stocks before they decide to invest certain stocks of a given company. This king of analysis ca be perceived to be following the inductive kind of reasoning, where an individual makes judgments on the current state and the future state on assuming that the future will be like the past. This kind of reasoning is invalid in the sense that what happened in the past is likely not to be the case in the future, as it is not logical. The factors that led to the past stock values are likely to change in the future, as there normally occurs changes in various industries with time depending on the demand changes. Thus investing in stocks because of the stock value trend in not a solid ground to evaluate the risks involved in shares, thus it is better for investors to invest in other assets like land which is certain to increase in price in the near future (Edwards, Magee and Bassetti, 31).
Reputability of the company also influences the pattern of investors investing in certain company’s stocks. The reputability of a company is normally a temporary situation that is subject to changes from time to time depending on its competitiveness in the market and also the business cycle. The investors normally have vested interests, hoping that the company will perform better in the future, thus the current performance is of less interest. The company’s reputation will only hold if it keeps its competitiveness, which is not certain because their might be new entrants into the industry with better standards than the incumbents or there may arise noble innovations among the competitors which will make the company to loose its reputation and competitiveness too (Wittman, 51). Thus reputation is never a good measure for the risks involved in investing in a certain stock, thus rather invest in property assets other than stocks. Any enterprising company normally goes through a business cycle, which is characterized switching between low profitability and high profitability, thus reputation is not a valid measure for the risks involved in investing in a certain company’s stocks.
The number of votes normally depend on the number of shares that an investor has, in other words the investors with majority shares are the main decision makers of a given company. This situation disadvantages the shareholders with few shareholdings, because decision making heavily depends on the investor’s economic might. This places the company at risk of collapsing because few persons with majority shares may take advantage on their decision-making powers to make decisions, which are certain to ruin the company. Being advantaged as being the investor with majority shares, it does not imply that you stand a better position for making informed decisions, because decision making is a matter of how rational one is and not how wealth one is (Traub, 51). This situation will lock out good decision-making process, which could have a rose from joint effort of both minority shareholders and majority shareholder. Therefore one should only invest in a stock of a certain company if he or she believes he can be in the group of majority shareholders if he was to influence in decision-making. This provides the minority share holders an incentive to stop their membership as their influence is minimal in decision making, which imply that there interests are certain of not being factored in designing the company’s policies.
The size of the company is also a misleading factor to consider because size has no strong relationship with the per capita profitability of the company, and as such even big companies are likely to make losses, despite their huge capital investments. Increased size is normally accompanied by increased management inefficiencies because of the increased scope operation to supervise, where these inefficiencies are likely to lead to avoidable losses in the case of small size companies. The purchase of stock in a certain company normally makes it to increase its capital base and hence its size. The increased size caused by investors investment in stock will lead to management inefficiencies which will certainly welcome losses, therefore its better for the investors to invest in their small businesses than in purchasing stocks of companies as they are likely to manage the capital better in their small businesses than when the capital is in a pool full of inefficiencies, thus alternative other than investing in stocks (http://www.incademy.com/courses/Investing-in-smaller-companies/What-is-a-small-cap/3/1069/10002 ).
The management team ability and also the company’s strategic plan at some state influences the investor’s tendency to invest in some stock of a given company. The investors justify their action on the basis that effective management team is likely to ensure good performance of the company. The argument is valid in the case of a vacuum industry where the managers are the overall determinants of the company’s performance, assuming that there are no external constraints that are able to hinder the management team effectiveness like changes in the markets conditions, which are at times unpredictable and if predicted then not very accurate. The management team can only design adaptive strategies to market changes and also promote accountability but not changing the market condition, in ensuring that the company’s competitiveness is restored. Therefore managers are limited to determining the company’s performance more especially in altering the market conditions; otherwise they are expected to act according to the changes in the market conditions other than altering the market conditions themselves (Alexander, 201). The company’s strategic plans are at times used to lure investors in purchasing the company’s stocks, hoping that on the implementation of the plans, high dividends will be guaranteed. Strategic plans are just projections, which are subject to either fail or succeed depending on the accuracy of focus assuming external influencing factors constant, therefore using strategic plans as a measure for the possible benefits inherent in purchasing certain stocks of a given company is invalid because the success of these strategic plans is never certain, thus it is better to invest in other investment opportunities which more certain than investing in a company’s stock just because of its investment plans.
Despite the above factors which justify the ill of using expectations as a measure for the worthiness of investing in a certain stock, there are also a number of reasons which makes investing in stocks unreasonable and they are discussed as given below;
The investing in stock can be seen as a better investment opportunity in terms of its returns in the form of dividends, but normally there are conditions which are attached on the holding of these stocks which are likely to limit the stock holder the right to access liquid cash when urgency arises. For instance, if an emergence arises like a need to meet a hospital bill, the stockholder cannot access his or her cash timely in settling the bill because of the predetermined schedule of distributing the dividends and any other benefits. The set conditions are so rigid in that stocks owned can never settle an urgent bill because of their slow rate of liquidation, thus investing in other assets is much more better than holding stocks when situations of emergence arises (American Finance Association 76). On may argue further that an individual should plan his or her expenditure by having some spare money for uncertainties like in the case for the theories of demand for money in meeting unexpected expenditures, but this is a weak argument because the magnitude of uncertainties is unpredictable and if they were predictable then one would have set a definite sum of money, thus investing in more liquid assets is better than holding stocks. The more liquid assets that can be held in place of stock include cash in savings accounts, which earn interest rates and also property with appreciating properties, which can be sold easily. Therefore the slow liquidation process of stock makes them an inappropriate investment opportunity.
Stocks are vulnerable to changes in the money policy in one given country compared to other assets like cash among other tangible assets. When an investor purchases a stock in a given company, the stock value is always valued at a fixed price which will hold for the rest of his or her holding of those stocks, and there will be a fixed dividend proportion in the case of the preference share holders. Normally an economy undergoes change in inflation rates meaning that during high inflation rates, the purchasing power of money is reduced and also during low inflation rates, the purchasing power of money increases (Lexis Nexis, Gale Group and Wilson Company, 31). The changes in the purchasing power of money disadvantages investors who receive fixed dividend because they are likely to suffer from the money illusions that comes with changes in inflation rates. The basket of goods that they could have bought is affected because the reduced purchasing power caused by increase in the inflation rate, where in this case inflation is the general increases of goods and services prices. Therefore investing in stocks is never a good investment more especially in economies where inflation is an issue. Inflation does not affect investments like land because when the prices increase, there prices also increase thus avoiding the suffering from money illusions as the purchasing power is restored as still the same basket of goods and services can be afforded because the prices increased proportionately to income (Dorsey, and Mansueto, 3). Therefore, it’s better to invest in other assets other than stock because it is vulnerable to suffer from money illusions when the inflation rates change. One may argue that its is good to invest in stock as it will improve the purchasing power of the investors’ income in the case of reduced inflation rates, but the uncertainties of predicting inflations makes the argument invalid, because at sometime inflation gets the citizenry unaware as it can be caused by other factors other than the changes in the monetary policy. The other factors that are likely to cause inflation include wars, droughts and also sudden population increase that exert pressure on resources due to immigrations among other factors, which are altogether unpredictable situations.
Change in the government policies are likely to affect the stock market than any assets that an investor can invest in. The government policies more especially the taxation policy will affect stock than when an investor could have invested in other assets other than stock like land among other appreciating permanent assets. The income that is generated is always subject to taxation, and it is taxed on a continuous process in whichever time an investor earns the dividends plus any other benefits. This is not the case in assets like assets, because one will only be subjected to pay tax, when selling the asset or buying the asset, thus the continuous taxation overtime on incomes arising from stocks owned are certain to increase the costs of maintaining the investment, which is certain to reduce the net returns from the investment. Therefore, following this argument, investing in stock normally adds a tax burden which will impact the returns on stock negatively, hence better to invest in assets whose taxation is once and lump sum, thus a disadvantage for investing in stock (Mitchell and Meyers, 206) Young H. and School W.. Other than taxation, the government’s direct intervention to the operation of certain companies, more especially where its also a share holder is likely to affect the returns on the stock, which will affect also the other investors. The is a likelihood that the government’s interests as a share holder might differ with the interests of other investors because the government is likely to act as per to the interest of the public, whereas the other investors might be aiming at maximizing their returns which are two different opposing interests (Bernstein, 48). Given the inherent powers of the government, the government is likely to win the battle, thus undermining the other investors interests which makes investing in stock a bad option because an investor has no powers to control on who should invest as the main agenda of the company is to sell stock to willing investors in it meeting the targeted capital base.
Another serious factor is that the investors normally invest in companies that they know little about, other than starting business of their own which they will understand better about their operations. This is a show that investors who invest in stock do not believe in their managerial abilities; otherwise they invest in stocks for their investments to be managed by somebody else. There is a likelihood that the persons who is managing their investment has vested interests which are contrary to the investor’s interests, thus investors normally run a risk their interests conflicting with the interests of the investments manager (Rye, 709). Thus it’s good for investors to invest in assets, which they have a direct control of them, which is likely to take care of their interests full. Everybody is trying to survive by outshining the other as per to the order of nature, and its the survival for fittest, therefore the managers are likely to put their interests first and then investors’ interest given the second priority. Therefore investing in stock in never an appropriate investment opportunity that will cater for the investor’s interests fully, thus investing in other assets is better than investing in stock.
A part from the above limitations of investing in stock, the nature of the stocks themselves makes them being not a good investment for both the common stocks and also the preference stocks. The common stocks are characterized by entitling the stock holder with the right to vote and also in decision making, but they are last persons to be compensated in case of the company’s liquidation because they are perceived to be the ultimate owners of the company. This option of being the last persons to e compensated in case of liquidations makes the stock holding quite risk compared to other asset holding because its not certain on how much shall remain for the common shareholders to be compensated if the company is liquidated, as its limitless meaning that the investors might loose both their stocks and also the dividends at the expense of settling the company’s debts. Another serious weakness with the common stock holding is that it does not have fixed dividend, as it heavily depends on the profitability level of the company, and also the distribution schedule is not definite, therefore it a game of gambling, which makes the whole process a risky. The return from other assets like interest on money in bank accounts held, is quite certain than investing in stock, because the returns are fixed and distributed over a given predetermined schedule, thus less risks hence portraying in stocks as being a bogus investment. Preference stock holding is never an exception to limitations. Preference stock holding is characterized by being entitled to fixed dividends over a predetermined distribution schedule. This is not a reason enough to sway the investors because their dividends are not assured for a definite period of time as the company management has the powers to buy the shares from them when it feels it being necessary and more especially when it wants to reduce the burden of paying the fixed dividends, thus it is just a flow of income that is not definite on when it should end, as it may get the investors in unawares, which is certain to costing them a lot due to the time required to adjust to a new investment opportunity, therefore investors should invest in assets which are certain on pertains to the future flow of returns. Another limitation for the preference stock holding is that the stockholders are given fixed dividends despite the company’s profitability level, and in this case they normally stand at a disadvantage when the company makes more profits using their funds but just paid back with the same amount of dividend. This situation benefits the company than the preference shareholder, because even in the situation when the company is making losses or low profits, it may opt to lay off the preference shareholders in the process of reducing the dividend burden, thus ever on the disadvantage side.
Conclusion. Investors have opportunities to invest in various assets, where investing in stock is an example of an investment opportunity. They invest expecting returns from these investments. The pattern of investing depends on the returns of the investment and also the risks involved in the investment, where there varied approached to risks with different investors and they can be categorized as being risk averse, risk neutral and risk loving investors. Investing in stock is mainly dominated by expectation of the investors, where their expectations is guided by various factors including the profitability of the company, the reputation of the company, strategic plans of the company, and also the trend of the stock value overtime among other factors. These factors can be perceived as invalid in using them as the basis of decision making on whether to invest or not invest in a certain company’s stock. Despite the above factors, the question of investing in stock is also regrettable because of the following reasons; it is difficult to convert stock into liquid cash to settle unexpected bills, the stock values are vulnerable to changes in the monetary policy of one given economy and more especially the changes in inflation rates which is also vulnerable to other factors like war and drought other than monetary policy, government policies more especially taxation and also the direct intervention of the government in the operation of certain companies , and the limited information that the investors have about the companies in which they are investing in.
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