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What Are the Pros and Cons of Equity as an Asset Class?

Peter Hann
Peter Hann

The advantages of investment in equity as an asset class include the great variety of investments and investment strategies at an investor's disposal. An investor may easily buy and sell shares in a certain company, an industry, a country or region, and may buy in the form of individual stocks, an exchange-traded fund (ETF) or a managed fund. The income from equity investments is often higher than income from investments in other asset classes, and there are opportunities for significant capital appreciation if value stocks are acquired. The disadvantages of investment in shares are related to the fluctuations in price and the relatively high risk of capital losses on investments. The brokerage fees and taxes involved in trading shares may make it disadvantageous to engage in frequent trades.

Investment in equity as an asset class enables an investor to use his own knowledge of the market to look for value stocks. This means examining the financial statements and likely future trends. The investor may bring to bear his own knowledge of the business or the industry in which it operates to arrive at an idea of the value of the shares. The investor may purchase a share based on a positive estimate of the management of a company, and also may use knowledge of future trends in the industry to make valuable investments. Equity prices often fall because of changes in investor sentiment rather than an evaluation of the value of the stocks, and this can represent an opportunity for value investing.

Woman holding a book
Woman holding a book

It is possible to invest in equity as an asset class in the short term, profiting from shares that are trending upwards for periods within the trading day. Such day trading involves a study of the trends and charts within the day rather than an assessment of the true value of a company. This type of day trading requires the investor to pay constant attention to the movement of share prices during the day. Each trade involves brokerage fees and taxes, so the gains made in these short-term trades need to be sufficiently large to cover the costs and make a profit for the investor.

The main disadvantage of investing in shares comes from severe fluctuations that occur in share prices. An economic slump, prolonged bear market or sudden market crash may wipe away a large percentage of the value of shares, and such events are difficult to predict. Investors who buy shares when the market prices are near their peak may lose much of their investment and need to wait a long time before the shares recover their previous value. Some shares never recover, or companies cease trading and most of the investment may be lost. Investment in equity as an asset class, therefore, needs considerable thought and constant review.

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