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Home Stock Risks
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Written by Administrator   
Friday, 27 March 2009 02:04

Stock risks

Are stocks risky? The answer to this question is yes stocks are risky, because you can lose money investing in stocks. In fact, the first second you buy a stock, there's at least a 50% chance the stock is going to be worth less than what you paid for it, and you'll already be losing money. It might only be a few pennies, but if you lose a few pennies, you've still lost money.

What makes stocks risky?

Aside from the normal flucuations in stock prices that occur on a daily basis, there are all types of situations that can make a stock fall:

* Company specific news

* Economic conditions

* Political issues

* Natural disasters

There are others, but these are the general reasons. And actually most of the reasons fall under the umbrella of news (bad or good) because just about everything that can affect business is reported as business news.

How do you reduce the risks?

The best way to reduce the risk of losing money in stocks is to mitigate the risks. So what does that mean? Well, you can never actually make the risks go away, but you can take steps to "soften the blow" if you happen to be in a stock that is the victim of a major selloff in stock price. Some of these steps include:

* Diversification

Always own several stocks at one time - NEVER, ever put all your money in one stock! Although I don't normally follow investment "guru" type people, I do listen if I think someone gives good advice. And Jim Cramer from Mad Money (he has a nightly show on CNBC in the US), advises to own a minimum of 5 stocks at any given time. I agree with Jim Cramer here. As I said before, NEVER (and I repeat: NEVER!) put all your eggs in one basket! Nobody can pick a "sure thing" and if you happen to pick the wrong stock to put all of your money in, you can lose lots of it very quickly.

The reason it's good to own several stocks at one time is because if you do happen to pick a bad stock that falls substiantially, you'll have other stocks to offset those losses with. In fact, if one of your other stocks happens to be a big winner, you may end up not losing any money at all. So, it just makes good sense to be in a few stocks at one time. Cramer also advises never having more than 10 stocks in a portfolio. I tend to agree with him here also. I think if you own too many stocks, your gains can become muted.

* Do your homework

You really need to be prepared to invest at least a couple hours a week to watching your stocks, and keeping an eye on your investments. If you can't do this, you may be unknowingly increasing your risk of losses and maybe should consider buying mutual funds or ETF's instead of individual stocks. Why? Because as time passes things change. Companies can report bad earnings, products can fail, sales can decline, competition can increase, etc. Basically, you need to make sure that the companies you invest in today stay on track and are still good companies to have your money invested in tomorrow. If something changes, you need to know about this so you can decide whether to keep your money in that stock, or move on to something else. Also, when you have a profit, you also need to think about selling the stock too. Don't forget that!

These are just the very basics about stock risks, but check back soon as i'll be adding more later about stock risks and how to further mitigate them.

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Last Updated on Saturday, 28 March 2009 01:58