Investing in Stocks: Risks You Need to Know About
Investing in stocks is a risky business, yet so many people try their luck in stocks due solely to the benefits.
If you are planning on investing in a stock, you should be well aware of all the risks associated with such an investment.
Without much ado, let’s have a look at such risks:
1) No Guarantee on Returns
We typically invest money when we approve the outcome. This is not the case with stocks as returns are not guaranteed.
You never know if the market will rise or decline and what will become of the stocks you’ve bought.
The price may go down, causing you a loss, or may go up giving you profit. While there is calculated information available out there, the results can never be guaranteed.
In short, stocks are like a roller coaster ride, it can make you ridiculously rich or poor in one night.
2) Inflationary Risk
Inflation is a market condition when prices go up. This causes everything to be more expensive, and as a result, there is a fall in purchasing power.
When you think of it, inflation sounds like a bad idea, but reports indicate that a little rise in prices is good for the economy, however, this rise can have a negative effect on your investment.
This is because a rise in prices results in more taxes, which means you will have to give a larger share of your profit and/or dividend in the name of taxes.
3) Default Risk
Default risk is when companies fail to pay the interest or principal on their debt obligations.
No returns, even dividends, are not guaranteed. In fact, 1 out of 7 companies in the UK are not even paying a dividend.
These include the likes of Royal Bank of Scotland and Lloyds Banking Group. And sadly, the conditions are not very different in the US either.
There are even instances when companies go bankrupt and investors have to taste a bitter pill.
This can cause your whole plan to fail as no dividends means a loss of potential income.
4) Interest Risk
Rising interest rates can drastically affect stock prices.
Most businesses in the US run on credit, and they, as a result, have to pay interest. Any change in interest rate can affect a company’s market position and cause share prices to go up or down.
This is a major risk as share prices are not in control of one entity but are affected by a cluster of factors.
5) Liquidity Risk
Liquidity risk is when you are stuck with your stocks and aren’t able to sell them or exchange into cash.
This happens when the market has no faith in a company, and hence, there are no buyers. In such a situation, you may have to sell your shares at a lower price, causing an increased loss.
These are some of the risks that you need to be familiar with when you are investing in stocks. Plan properly and take educated risks so that you can make a beneficial profit. Moreover, make sure to join a group like Investors Hangout to keep an eye on the latest happenings in the stock market so that you are always in the know.
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