The stock market is a place to build wealth, and those who understand the process of finding value in stocks will typically fare well over the long run. The potential rewards in the stock market are high, but there are also quite a few risks. Many financial professionals, myself included, believe that the rewards often outweigh the risks, but you must always understand the risks before you take that first step of investing your money. What are the primary risks that you must fully understand before getting started?
Top Four Risks to Understand Before Investing in Stocks
4. The Books Can Be Cooked
Investors in former companies like Enron or WorldCom know all too well that financial statements are not always an accurate picture of what is going on at a company. Using financial statements that are made available to the public is the best way to determine the value of a stock, but there is always some risk that the numbers you are looking at aren’t accurate. There are scammers everywhere in the world looking to make a quick buck at the expense of others, and the stock market is no different
3. Irrational Market Trading
The interesting quirk about the stock market and its trading patterns is that the market doesn’t always make sense, even to the most knowledgeable experts. Stocks always fall too far when investors are panicked, and they always go too high when investors are euphoric. It can be almost impossible to make sense of short-term market moves.
2. Economic and Political Uncertainty
Compared to most places in the world, the United States has a stable political system. Even though that is the case, there is definitely some risk in the stock market that a certain bill will be passed that will spook the markets. The economy drives the market, so any kind of economic downturn is always going to eventually hurt the market. As the economy goes, so goes the stock market in the long run.
1. Don’t Invest What You Can’t Afford to Lose
The largest risk of investing in the stock market is clearly the risk of your stock price falling, which leaves you with less money. The value of the stock can fall as zero, so make sure you haven’t invested money that you can’t afford to lose. While no one likes to think about the worst case scenario, it should always be considered before diving into the waters of the stock market!