What are the Risks Involved in Trading Stocks?
Investing in stocks can be rewarding. But just like any other type of investments, there are risks. Regardless, the stock trading market is still full of investors who are hoping to turn their investment into something big in the years to come.
Data gathered by Statistic Brain revealed that around 52% of Americans have invested a portion of their money in stocks. The remaining 48% could either be those with no money, no knowledge about stock trading, or are simply afraid of taking risks.
But what are these risks? They are as follows:
- Losing your capital
One of the biggest risks of investing in stocks in losing capital. If you invested in a particular company, the share price may fall way below the price you originally paid it for. In worst cases, it might be even zero.
For example, easyJet initially sold their shares £280 back in 2000. While easyJet share price is now at around £1,600, there’s no guarantee when it will go down. If you invested recently and the price goes down to £1,000, then you won’t have any returns at all.
If that particular company goes bankrupt, shares become untradeable and most likely delisted. During liquidation, shareholders are the last to receive any funds that might be left, right after banks, suppliers, etc.
- Returns aren’t guarantee
While stocks have been known to perform well in a long-term perspective, there’s no guarantee that you can enjoy returns on a stock at any given time. Even though you can be able to assess a stock, there’s just no way of predicting how it will perform in the future. You don’t have a guarantee that it will increase in value or if the company will pay dividends.
Inflation, likewise known as “purchasing power risk”, is no doubt the biggest financial threat of all, especially when it comes to investing in shares. Most investors often retreated to using “hard assets” like gold and real estate in order to deal with inflation. However, if you don’t have any of those, you might end up empty-handed.
Prices for shares are volatile. This means that they’re not consistent and may go up or down significantly in just a short period of time. This is one of the reasons why investing in stocks is risky – you could end up losing your money without prior notice. This is a common event in startup companies, although it can also affect shares from larger ones.
- Trading suspension
There are cases when a stock is suspended from trading. It is done in order to prevent any uneven information from spreading and to make sure that trading is done on a fully informed basis. During a suspension, you won’t be able to buy or sell your shares. This is also the time when the price may move up or down due to business and market risks changes.
While risks are mostly unavoidable and we didn’t even talk about doing your investment taxes, there are steps you can take to manage them. First, make sure you know what you’re investing in. Second, assess whether it’s reasonably priced or not. Lastly, think long-term.