July 23rd, 2008 by Money Manager
As a beginner investor, there is always one thought at the forefront of our minds, “what if I lose all that money”. This thought can sometimes paralyze us and hold us back from moving forward with educated decisions and opportunities to make those rewards.
Most beginner investors first start with the stock market. Considering this investment vehicle, lets look at the risks that you face as an investor. What most people don’t realize is that there are two forms of risk that reside in the stock market:
1. Market Risk
2. Company Risk.
Market risk is first of all something that none of us control and all investors, whether they are novices or experienced, are exposed to this risk. There are all sorts of conditions that influence the market, such as political, economical, cyclical, and day to day financial news. It is a general risk that the entire market faces and as a result stock prices go up and down. Of course there are exceptions but it is very rare to find a stock that is NOT affected by market risk every now and then. There is very little an individual investor can do about market risk so don’t waste your time analyzing it.
On the other hand, market risk can be narrowed down to sectors and industries and therefore the beginner investor can have some control over the choices they make. For instance the financial stocks have been hard hit the last 12 months, real estate and mortgage stocks are also likely to have gone down, whereas certain technology sectors have experienced gains. Factors such as interest rates and economical conditions can give you an indication of which sectors will suffer and those that may prosper.Â Within each sector and industry, there are many companies to choose from. Even if a sector is doing well, you then have the company risk to deal with.
The good news is that there is a way to minimize the risk to your stock investments. Instead of putting all your money into one stock, reduce the risk by diversifying your portfolio - select five or more companies. This way you have an average return from all the companies in your portfolio. Some will overperform and some may underperform from your expectations.
Picking the stocks and making a portfolio may be easy for some and relatively difficult for others. Depending on your experience and comfort level, you can either create your own portfolio or pick from portfolios that are already created for you by your investment broker.
Hopefully this was helpful to the beginner investors in our community. Let us know if you have any questions or comments to this post.
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