Pros and Cons of Trading

When you hear of trading, what comes into most people’s mind is the buying of goods and services. However, there is more to that in trading. Trading is a great way to grow your wealth by investing in stocks, index funds, ETFs, mutual funds and even bitcoin.

Some of the world’s richest people such as Warren Buffett have made a fortune through trading. There are pros and cons of trading that you need to consider before starting. We are, therefore, going to focus on the advantages and disadvantages of trading.

Pros of Trading

Easy and Convenient

Some types of trading are quite easy. All you need is to devote your money to a project and wait for it to grow. For instance, if you are trading in stocks, there is less that you need to do. You just need to put your money into that stock and wait for the returns at the end of the trading period.

What does margin trading mean? Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.

High Returns

Trading has high returns that prompt people to quit their jobs to focus on making money through trading. The Return on Investment is usually high and you can recover your money in less than six months. However, it is important to note that trading with high returns attracts higher risks.

Generate Revenues and Income

Trading creates opportunities for traders and businesses to help them generate income and revenues. Businesses that participate in trading activities are able to generate revenues and employ people and help them earn a living. This creates job opportunities and livelihood for professionals. Many countries are encouraging their citizens to start trading to help people grow their wealth and eliminate poverty.

Price Discovery

Trading helps to find the right prices for services and commodities. The demand and supply within the market control the prices of goods and services. Therefore, it is only through trade that prices can be discovered. For instance, if a commodity is highly priced if the supply is increased, it is likely that its prices can reduce.

Liquidity

Trading brings about liquidity in the market. Liquidity is the availability of assets in the market. Liquidity in the market leads to reduced risks which in turn increases opportunities. When the opportunities are many, people have the freedom to trade where they feel that their money can fetch more returns.

Reduced Risks

Trading reduces risks significantly. Overnight risks are eliminated and although you will realize some ups and downs, they won’t be instant. Unlike gambling where there are extremely high risks, in trading, the risks are there but don’t happen overnight.

Forex trading meaning: Forex trading is the exchange of one currency to another for trading purposes.

Cons of Trading

High Risks

While trading, you can make a profit or a loss. As such, you need to be very careful and consider the level of risk before you can start trading. Generally, trading with high returns always attracts higher risks. You can lose the money you have invested and get into financial distress. It is not advisable to borrow money to use for high risky trading.

Tax Liability

Many countries have varying tax rules. In many countries, trading activities attract tax liability. For instance, for most trading companies, the corporation tax is usually 30% of the profits. This tax in most times is not friendly for startups that have not gained a market share. It also makes it difficult for businesses and traders to expand their operations.

Easy Losses

There is an assumption that trading is a simple way to make money. What many people don’t know is that there are high chances of making losses. The markets are usually uncertain and there are no fixed criteria to avoid the losses. It is possible to lose one’s fortune overnight.

Unpredictability

It is very difficult to predict the market. There are many factors that influence the profitability of any trader. Sometimes the opportunities and risks are unforeseen and you can’t determine the probability of losing or gaining.

Large Capital

To start trading, you need to invest a significant amount of capital. If you don’t have the capital, it may be challenging to trade. As such, you may need to borrow money to invest. The higher the invested capital, the higher the rate of returns.

It is Addictive

Some types of trading are addictive. Trading is like a casino machine. Some people tend to use all their savings to trade leaving them with no savings. The most advisable way of trading is to place a trade and when you are done, you can relax.

High Risks in Trading

Trading comes with its own set of risks. One of the risks that traders are faced with includes revenge trading. Revenge trading is whereby a trader trades more to try and recover the money they had lost in the previous trades. There is also the risk of impulse trading. This is where a trader trades without a prior plan. Most of the time, impulse trading and revenge trading lead to losses.

Final Word on Advantages and Disadvantages of Trading

Trading has overall benefits to a trader. However, it is very important to consider the risks before investing to avoid possible losses. Overall, trade is good for financial growth.

 

Vincent is a writer with an interest in finance, business, technology and health niche. He holds a Bachelors degree in Applied Statistics with computing. Read more about Vincent and see our complete editorial team at FiFi.