Buying stocks is a popular investment strategy used by many people around the world. The appeal of stocks is perhaps because they offer higher returns than other forms of investment. You also have the added benefit of being able to buy and sell shares without having to hold a stock certificate. However, there are risks associated with stocks. Here we look at some of these risks – what you need to know before you start buying stocks.
The primary risk involved in investing in stocks is the company going bankrupt and going through liquidation. If this occurred, you would obviously lose your initial investment but with regular investing, this would be the least that you stand to lose. You could make money from other, different companies which may go bust in which case you could still make money. Of course, there is also the risk that a single stock will fall in value, meaning that you will lose all of your invested money. This is why it is important to be well informed about the stock market and know when to buy and when to sell.
There are several ways in which the stock market can crash. One of the most common reasons for crashes is interest rates. As they rise, so does the cost of shares and so does the number of shares that are available for sale. If investors begin buying up stocks at the beginning of rises in interest rates, they can make huge profits over the short term but will soon see their investment portfolio deplete if they do not sell all of their stocks at once.
Another potential problem with investing in stocks is that they are difficult to sell. Before the internet, selling shares was quite difficult as they had to be bought in person or by telephone and then placed on the market for trading. With the introduction of the internet, this problem has been removed. Now all that investors need is a computer with an internet connection and they can place their order for trading stocks online. In addition to this, many websites offer dividend reinvestment schemes where the investors’ dividends are used to buy back the stocks that they have sold, enabling them to realize capital gains.
Although stocks are cheap and easy to buy, they also come with a lot of risks. Investors need to remember that as long as the company makes a profit, the only thing that will change is the price. If the company makes no profit for a number of years, then it will become unprofitable and that means there will be a large number of shares outstanding. This will result in a large number of buyers and a drop in price. So it is important that before you start investing in the stock market, you take into consideration the risks associated with it.
The easiest way to ensure that your investments do not fall into disrepute is to consult a qualified accountant and have your accounts audited on a regular basis. They will be able to provide you with reliable information about whether or not the corporation is making a profit and whether or not the shareholder’s equity is increasing. If you want to increase your share of profits, then you will need to increase your share of the corporation’s equity. However, remember to never sell all of your stocks at once, so that you do not lose all of your invested funds in one fell swoop!