The main disadvantage of common stock is that in case the company needs to be liquidated, they won’t see a cent of their money after the bondholders, other debt holders, and preferred stock owners have received their part.
This scenario shouldn’t be dismissed by a responsible stock investor. After all, Enron and WorldCom plunged themselves, and thousands of Americans, into a spiral of financial disaster.
Owning stock is one of the best ways to invest your money. But remember, it must be done wisely. Investing in common stock should be seen as a long term investing, not as a quick skim to make enough money for buying yourself a new computer or a new apartment.
That’s why there are certain things that need to be considered. First, do not invest all your money in one company. Putting all of your eggs inside one basket isn’t a wise decision. That’s why you have to divide your investment into different fields of the industry. That way you won’t be affected by fluctuations in the common stock value.
For example, in the dot-com bubble of the year 2000, thousands of Americans had invested all of their money in crazy online schemes like Pets.com, without even evaluating their business plan or their true rate of return on common stock.
Unfortunately, many people forget the true meaning of the common stock definition. That’s why, every once in a while, there is a bubble. Like the one that happened in the 1980’s thanks to biotech companies. Common stock prices can be pretty volatile, speciall