What are Your Investment Risks?

by Martin Lukac

You've heard there are risks in the stock market, but what are those risks exactly?

One of the main reasons that people say they won't invest in the stock market is risk. But ask them to explain risk and they can't go any further than "I could lose all my money." Risk isn't that simple.

Risks are classified based on the behavior of the stock prices in the market. Understanding what stock has what risk is one of the basic things you should master before you begin investing.

Don't be fooled into thinking that low risk means no risk. It is true -- you could lose everything. This is because there are absolutely no guarantees in the stock market -- not by the government, not by the company you are investing in and not by your stock broker.

You could also call your risk a different name -- the unknown. You cannot accurately predict what stocks will do every time. For example, you might purchase a stock that you expect to rise in price over time. You are looking forward to receiving nice annual dividends. However, the company is sued and experiences financial problems. You may not see the dividends you were betting on. In fact, if the company goes under, you could lose your entire investment. You've just met risk face to face.

When looking at risk, you should consider both the stock's risk and what that risk represents in your overall portfolio. This will depend on the diversification of your investment portfolio. You have higher risk with stocks and lower risks with bonds and money markets. However, the risks associated with investing in stocks are less than investing in options or futures. And remember that there are different types of stock with different risk levels. Speculative stocks have a higher risk than Blue Chips, in general. You need to understand the risk level you are taking on with each of your investment choices.

You should also look at your time frame for investing. History lessons show that stock prices outperform almost every other investing option over the long term. However, short-term stock prices have about a 50% chance of going down. If you are only looking to invest for the short term, you should perhaps consider other options. If you have plenty of time -- say thirty years -- time will help in mitigating your risks. Know how time plays a role in your portfolio when it comes to risk levels.

There are several risk reducing strategies out there, including diversification and investing for the long term. Once you understand the risks associated with investing in the stock market, you should start considering which stocks fit your overall game plan. Your risk level may be different from someone else with the same income and investment potential. This is because you are a unique investor. You have your own emotional capacity for risk. Some people embrace it and others become nauseous. Know your risk level before you invest.

About author:
Martin Lukac http://www.MartinLukac.com, represents http://www.RateEmpire.com , an Internet consumer banking marketplace. RateEmpire.com is a destination site of personal finance, investing, taxes and mortgage rates. RateEmpire.com provides mortgage guides and financial rates and information. RateEmpire.com also operates a financial portal #1 American Financial, found at http://www.1AmericanFinancial.com

Published under category : Trading Risk & Money Management