Stock
Investment Risk
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What are the Risks of Investing in Stocks?
Investing in the stock market is
inherently risky. There is a very real risk that you will
lose some or all of your initial investment. If you speculate
with leveraged accounts (buying stocks on margin) you can
risk far more than your initial investment. If you diversify
your portfolio, pick your stocks carefully and do a proper
valuation analysis before investing any money you will minimize
you risk - but you will never eliminate it.
Risk derives from a number of factors
- most of which are out of your control. Consider the following
risks:
Business Risk: Business
risk refers to the possibility that the management team of
the company you invest in may not perform at a level that
is adequate to generate a good return on your investment.
Individual Stock Risk:
If you invest all of your money in a single stock, you are
exposing yourelf to greater risk than if you invest in a diversified
portfolio of stocks in different industries. Through proper
diversification, you can reduce much of this risk.
Market Risk: There
are occasions when the entire market declines precipitously.
When this happens, it is likely that irrespective of the stocks
you have picked, your investments will suffer.
Liquidity Risk: Liquidity
risk refers to the fact that while markets are generally well-behaved,
you may not always find a cadre of willing investors to take
your shares off your hands at a reasonable price at the time
you are ready to sell.
Interest Rate Risk:
If you invest in fixed-income securities, such as preferred
stocks or bonds, you will be exposed to interest rate risk.
Prices of these securities will move inversely to changes
in interest rates.
Inflation Risk: Stocks
have generally proven to be a good hedge against inflation.
Historical returns on stocks have typically outpaced inflation
by a fairly wide margin. However, this is not always the case.
There have been occasions when the economy (and stock prices)
have lagged while inflation has raged.
Taxation Risk: Tax
laws are continually changing. And with these changes come
additional risks relating to how your dividends and capital
gains will be treated from a tax perspective.
While it is important to understand
these risks, they should not necessarily deter you from investing
wisely in the stock market. Most financial experts agree that
in order to achieve a comfortable retirement, most people
would be wise to invest at least a portion of their discretionary
income in stocks.
How
Stocks are Valued
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