What are the disadvantages of stock exchange securities?
There are many disadvantages of the stock market.
First, there is always a risk to losing a great deal of money. Companies can go bankrupt. When this happens, you can lose all of your money. A sobering fact is that it has happened in the past. Think of companies like Enron and Worldcom. If you are young, you probably never heard of these companies, because they have gone bankrupt. If you owned shares, you would have incurred great losses.
Second, there are professional traders and huge hedge funds that take advantage of greater knowledge, great speed in exercising trades, and on account of their money they even have the ability to move the markets in a certain directions. These three points are not small advantages. In many ways it is unjust.
Lastly, there are some stocks that are very volatile. For example, leveraged ETFs often lose money in the long run, because they are short-term plays. If you don't have good timing or the knowledge to work with these stocks, things can be disastrous.
Any security in the form of shares, debentures and bonds, issued by the government or semi-government institutions and reputed private sector concerns can be used as security for securing loans. Such securities that are quoted on the stock exchange are known as stock exchange securities. There are a number of disadvantages associated with these:
- Market-linked: since these securities are market-linked, during an economic downturn a bank may not be able to recover the complete value.
- non-saleability of some securities: not all the securities can be easily sold on the market. If a loan has been made against them, it may be difficult to recover the cost.
- Partially paid up securities: In some case, the securities are not fully paid up, i.e. individuals have not fully paid the company. In such cases, banks have to face issues in complete recovery.
- Forgery: In case of forgery such as a forged signature or forged share receipts, recovery of the loan is difficult.
The major disadvantage of investing in stocks is that you can lose all or part of the money that you have invested. For example, the Dow Jones Industrial Average here in the United States (a measure of the prices of some select important stocks) is something like 10% lower now than it was in the middle of 2008. A person who invested in these stocks in 2008 would have lost money on the deal.
The other two disadvantages are somewhat less important. First, investing in stocks is complicated if you are going to try to pick the stocks yourself. Second, you tend to have to pay fees to brokerages when you buy and sell your stocks.
Investment in stock market securities involve an element of risk. There is no guarantee of returns and there is high probability of losing money. Money may have to be often left untouched for a long-term. Companies have their priorities and objectives, ignoring the interests of the shareholders' interests. Small investors do not have adequate knowledge of investment and have to depend on brokers and may have to pay higher brokerage fees.
Certain stock exchange securities are not easily saleable in the market and if the bank advances loans against them it may have to later on face some difficulties in realising its due and may not be able to recover total debt. If the shares are partially paid up and the bank is registered as their owner, the bank may be asked to pay the uncalled amount of shares. If the securities are not negotiable, the repayment problem can arise.