Is investing in stocks risky?
Is investing in stocks risky? Simply put the answer is yes; there are a number of factors that make stocks risky.
Unlike fixed income securities, the return from stocks is completely subject to the financial performance of a company.
Not only is the financial return volatile, but you are also risking losing your whole investment.
One can simply look at the recent financial crisis in 2008 as a prime example of how many lost millions due to investing in stocks that they believed to be “low-risk”.
There will always be bear markets, when stock performance is poor, this happens regularly – and will always occur. You can somewhat reduce your risk if you keep a diversified portfolio of blue chip stocks for the long term – as you increase the likelihood of riding the business cycles and coming out ahead.
However, how do you know which businesses will survive the bear market periods? The consequences of a downturn in the market can be very detrimental – depending on how much the markets decline – and there is always a risk of companies going bust and declaring bankruptcy.
All this uncertainty is what makes investing in stocks a very risky business. Unless you have inside knowledge and make a stock purchase (which is illegal) then you really have no idea how the markets will work.
It is important to understand that investing in stocks can sometimes be a very lucrative means of increasing capital gain. However, it is certainly not a risk free method.