Financial Risks Of Investing In The Stock Market

One of the biggest risks when it comes to investing in the stock market is financial risk. Make a poor investment and you may lose a significant amount of your money, or worse, all of it!

The most obvious cause of financial risk when investing in the stock market occurs due to companies going bankrupt.

Although any company that is doing poorly can see a rapid decline in their stock values, which of course means a decline in the value of your investment.

Reduce Stock Market Investing Risk

To reduce your risk of financial loss in the stock market, the most important thing you should do before making an investment is to do adequate research beforehand.

Although this might sound like an obvious step, you would be surprised at how many people jump on an investment because they “heard” it was a good bet.

A good example of this can be found in the late 1990s, when many investors who invested in the stock market ignored the obvious financial risk of popular stocks because everyone else seemed to think they were a good investment.

Unfortunately, many of these investors then proceeded to lose a lot of money when the dot com bubble burst.

After the dot cot bust, internet and tech stocks littered the stock market graveyard. Simply because investors failed to see the risks associated with investing in companies which didn’t have a proven track of results (such as profit and sales).

The lesson we learn from this is that when you invest in the stock market but invest in companies which do not have a proven track record, you are not investing, you are speculating.

Or in other words, you are gambling with your money, and everyone knows gambling is a very risky activity to engage in!

Wise Stock Market Investments

On the other hand, wiser investors who took the time to research such companies decided to put their money elsewhere.

Their research indicated to them that such internet companies had high debt, low earnings and lots of competition.

All of these factors are considered to be high risk when it comes to long term investing in the stock market, and by doing the research beforehand, these investors saved themselves from losing millions.

This brings to the forefront another important lesson about stock market investing. When investing in the stock market it is important that the stock market is not seen as a way to make a quick buck.

If you start making short term investments some may pay off, but in the long run you are likely to lose more money than you make.

The stock market should therefore be seen as a long term investment, and something that you will keep for at least 5-10 years.

By adopting such an investment strategy and doing adequate research before you buy stocks, you will greatly eliminate the financial risk associated with stock market investing.

Be Careful When Receiving Investment Advice

One final point to make about the lessons learnt from stock market investing is who you get your information from.

Many investors for example who invested in these internet companies, did so because stock market analysts and media sources were reporting them as a safe and a profitable investment.

The result was that many investors who had not invested in the stock market before decided to buy stocks based on the advice they were getting from the “experts”.

Unfortunately, because they were new to the stock market, they failed to do their own research and just trusted what they were told.

Before long it seemed like everyone was investing in internet stocks, and the excitement of everyone rushing out to buy these stocks caused people to leave their senses behind as they feared being left out and losing out on some “easy money”.

So the lesson is simple. When doing stock market investing get your information from multiple sources, and don’t rely on just one person or one source.

Second, don’t invest in something just because everyone else is investing in it, especially if you haven’t done the research beforehand.

Just because other people are buying a certain companies stock, doesn’t necessarily make it a good long term investment.

Basics Of Stock Market Investing

If you remember nothing else about stock market investing then remember this. The most basic rule when it comes to making successful long term stock market investments is to invest in companies which are making money and have a positive growth curve (are predicted to make more money in the future).

If a company is making money and you invest in them, over time the value of your stocks will go up and you will make money.

If however a company is not making money, or is not profitable, investing in them is a bad idea and one that will most likely lose you money.

This may be simple advice, but it is the most fundamental rule you need to remember about stock market investing.

So use the lessons learnt from the dot com bust and make sure you don’t forget the basics and get carried away because of what everyone else is doing.