As more people around the world are waking up to the importance of investment, a number of methods of getting your money to work for you are fast emerging. These include traditional methods in the form of stocks and bonds as well as newer forms of investment like cryptocurrency. Young and novice investors have begun looking at crypto as a viable and standardized form of investment. However, as with all investment options, there exist a number of caveats. The primary one being, volatility. It is essential that you carry out adequate research before committing money to any one of these investment options.
What are Stocks?
Stocks are essentially pieces of a company. This method of selling off shares in a business has been around for centuries. An owner of a single stock or a share in a company owns part of said company. It also entitles the owner to a share in the profits and assets of the company. These stocks are traded through the stock market in accordance with various government guidelines. Companies mainly sell stocks to fund their operations, to pay off debt, to help finance a new product or branch amongst other reasons.
These stocks change in value along with the company and can often prove to be very lucrative for investors. Stocks are broadly converted into two types: common and preferred. Common stocks entitle their owner to additional voting rights. On the other hand, preferred stocks provide dividends to the investors but do not offer any additional voting rights. You can choose any type of stock depending on your priorities and unique needs.
You can earn money in two ways through stocks. The first of these is through dividends that are paid to the shareholder from the profits that the company earns and the second is through the value of the stock itself. Investors who are in for the long haul and are willing to wait several years for a substantial return on their investment are more likely to be met with positive results.
What are Cryptocurrencies?
Cryptocurrencies are a form of digital currency that is secured using cryptography. Several cryptocurrencies are stored on decentralized blockchains that consist of remote ledgers stored on a network formed by several computers. Cryptocurrency does not possess an issuing agency and hence is largely immune to interference from governments. Bitcoin was the first of the many blockchain-based cryptocurrencies and still is by far the most valuable of the lot, despite its recent troubles.
Crypto eliminates the need for a third party like a bank to intermediate the transfer of funds between two entities through its several layers of security. Cryptocurrency has been the target of a lot of criticism for its ease of use in underhanded transactions, the volatility of its exchange rate and the infrastructure on which it is built. In the same breath however, it is praised for its transparency, its resistance to inflation and its unmatched portability. Ethereum, Dogecoin and several others have been growing in value in recent months and represent a very viable option to several investors.
Safety of Stocks and Cryptocurrencies
Investment by nature is a dangerous game but when played correctly, it can prove to be incredibly lucrative. There exist however, several key differences between stocks and cryptocurrency. When you purchase stock in a company, you are buying a piece of the business as well as a share in any potential profits. Crypto is more akin to exchanging several rupees for a dollar and then waiting for the dollar to go up in value before converting it back to rupees.
Each of these possess their own pros and cons. Stocks allow you to track and assess the progress of a company and its prospects before investing. Trading in stocks is risky, as the fate of a company is down to several internal and external factors. However, this risk can be mitigated to a large extent by doing proper research and analysis to choose stocks with the better long term prospects. It is therefore important to assess the fundamentals of a company such as their P/L statements, company board, partnerships, liabilities, revenue, operating costs, and more.
Buying stocks in various companies in the form of Mutual Funds also helps to mitigate risk by making up for any potential dip in the value of one company with a rise in the value of another. If a company were to fail and go bankrupt, the common stockholders would be amongst the worst affected. When said company’s assets are liquidated the common stockholders are only given a split of the leftovers after the bondholders and the preferred stockholders in the company have been paid off. More often than not, this could amount to nearly nothing.
While stocks are often volatile, they are more likely to stabilize in due course. Cryptocurrency is attractive to investors for its potentially and apparently large profits in short periods of time. Currencies like Etherium and Dogecoin have risen exponentially in value over the course of the last year, despite the dip in the last few months. The novelty of cryptocurrency makes it so that it could either make your entire portfolio or it could be the reason you lose everything that you have invested.
It is more difficult to predict the way in which the crypto market will move because of this novelty. The market has also shown that it is quite easily manipulatable by users of social media, making it a rather volatile option. Hence, when compared to equity stocks, cryptocurrencies are more volatile.
In a Nutshell
Both equity stocks as well as cryptocurrencies have been rising in popularity over the years. However, there are certain differences when it comes to these two investment options. For starters, the amount of risk varies. With high risk comes room for potentially high rewards. Depending on your risk appetite, you can choose to invest in either stock or cryptocurrency. You can also choose to diversify your portfolio by including both of them in proportions of your choice and expectations from your investments.
