Understanding What Risks Are Involved When Buying Stocks
A lot of people are interested in investing. They perceive it as a great opportunity to earn some great money, but does it mean they are right?
When it comes to this, it’s worth mentioning that this type of activity can be potentially lucrative, but is also filled with risks. Even the most experienced investors are not always confident and do have fear of loss. And that’s completely understandable because, at the end of the day, no one wants to lose their money.
That’s why you have to be smart about your investment decisions if you want to prevent potential major losses in the stock market. If you want to learn more about the risks that may arise during this process, stay tuned and you’ll get all the information.
What are the biggest risks for stock investors?
Market Value Risk
This type of risk refers to what normally occurs when the market either ignores your investment and turns against it. Furthermore, this happens when the market finds something else much more tempting, and then it leaves many high-quality, yet unexciting corporations behind.
Moreover, it also occurs when the market crashes because both good and bad stocks suffer because investors decide to stampede out of the market. Now, although this may not seem like anything positive, a lot of investors perceive it as a good thing and see it as an opportunity to pile up a bunch of great stocks.
On the other hand, when it comes to your cause, it doesn’t advance it, because you are witnessing different parts of the market rise, while your investments stagnate. Therefore, you should never focus on only one sector.
There are so many interesting ones out there, that can also be very profitable. For example, if you are interested in classic works of art, then you should find a good Masterworks review — a great investing platform that gives people access to reputable art —, to see how you can invest in blue-chip art. All in all, the point is to spread your investments across various sectors because if you do so, you will have a better chance of earning some substantial amount of money.
What does it involve? It is the risk that various stories in the media are going to negatively affect your company’s business. Nowadays, we are constantly bombarded with negative news, which means that nobody is safe from headline risk, not even your corporation.
For instance, news regarding the Fukushima nuclear crisis, ten years ago destroyed stocks with any related business, starting from U.S. utilities with nuclear power to uranium miners, and many others.
It just goes to show that one example of bad news can practically cause a market backlash against a certain company or even an entire sector. Unfortunately, sometimes both are involved.
Furthermore, larger-scale bad news, for example, the debt crisis that has hit several Eurozone nations ten years ago can also punish entire economies. You can only imagine what stocks can do.
What are other risks that we didn’t mention?
It is widely known that government is prone to changing taxes frequently, therefore, taxes may either decrease or increase in a particular sector where you already invested. This type of change can definitely impact the stock price.
Furthermore, there are a couple of industries that are taxed much higher in comparison to others, which is why their net profit after tax can potentially be less. Moreover, since taxation is controlled by the government, there isn’t much you can do about it.
Some investors know it as a purchasing power risk and it is here to show you that the cash flowing from a certain investment today may not have the same value in the future. Namely, changes in purchasing power because of inflation may lead to inflation risk.
That’s why some ETFs, such as the iShares Barclays Treasury Inflation-Protected Securities Fund (short for TIP) invest their money in U.S. Treasury inflation-protected securities precisely to avoid any inflation risks.
Possibly, one of the most transparent risks when it comes to investing is that the economy can experience a downfall at any moment. Back in 2000, during the market bust and then in 2001, when the terrorist attacks occurred the economy practically collapsed.
A mixture of various factors saw the market indexes suffer the loss of major percentages. It took many, many years to return levels to normal, to pre-September 11 events. Unfortunately, in 2008, the world has experienced another huge financial crisis.
It is easy to conclude that things can be very volatile. If you are relatively new to this, then the best thing you can do is hunker down and deal with these downturns. Further, if you can enhance your position in solid corporations, this is the perfect moment to do so.
Now, foreign stocks can generally be a very good opportunity when the domestic market isn’t doing well, and because of globalization, many corporations from the United States get a majority of their profits precisely overseas.
However, it is worth mentioning that if a collapse, (similar to those from 2008) happens, then it is going to be pretty hard to find a safe place. Now, when it comes to older investors, they are in a tighter bind.
If you are over sixty years old and you haven’t shifted any major assets to fixed-income securities or bonds, then a huge downturn in the stock market can be quite dangerous for you. That’s why it wouldn’t hurt to always have portfolio diversification on your mind.
Poor Execution Risk
This occurs when your broker is experiencing some issues regarding filling your order which can happen for various reasons, such as, quick market conditions, the absence of other sellers and buyers, and poor availability of stock.
In these situations, the results are almost always the same. The price you expect is not the one you receive. Even though you can mitigate this issue to a certain degree by employing limit orders, you still risk not getting your order filled at all.
As you can see, there are so many risks that can happen while you are purchasing stocks, and to think we just listed a couple of them. If you decide to embark on this stock journey, make sure to first carefully go through this article to gather all the necessary info.