I am sure you are well aware that there can be a great deal of money to be made trading the stock market. There are hundreds, if not thousands of success stories when it comes to investing in the stock market – overnight millionaires, patient long-term investors, parents proudly paying cash for higher education.
However, whilst this is true, it is very important that you fully understand the stock market risk factors, because for every stock market success story there is an investor who has lost some or even all of their money.
So if many fortunes have been made, but a lot of people have lost their shirt to stock trading, than you may be wondering what has seperated the winners from the losers? The answer is relatively simple: you must fully understand the risks involved in stock trading and how to mitigate those risks. It is very important to be fully are of the stock trading risks before you begin.
There are many factors that should be considered when deciding on a risk profile including:
How old are you?
Forgive me for being personal, your age can be a big factor when deciding on how much risk to take. If you are about to retire and have worked hard all of your life and saved up a good amount of money, a more conservative investment approach is more likely to be suitable.
You don’t want to risk losing a substantial amount of your money later on in life, as it will make your retirement much less comfortable. Blue chip stocks are often a good option in this instanceas, as are bond funds and other more “stable” investments.
However, at the other end of the spectrum, if you are young taking on more risky investments might a more appealing option for you. Growth Stocks and Penny Stocks offer the opportunity for higher returns but often contain more risk. Depending on your intended use for the money, an age appropriate mix of stability and growth is ideal for the majority of investors.
Do you have much of a disposable income?
Another important factor is the amount of disposable income you have. If you are young, earn good money and live with your parents for next to nothing, taking on more risk would be more appropriate than somebody with a very low disposable income and a family to feed. Always consider the fact that in order to realize the most gains, any money invested in the stock market should be capital that you do not plan on utilizing for at least five years.
Your appetite for risk
Your personal appetite for risk is a big factor too. Personally I am very boring and conservative with my investing, my appetite for risk is low. As a result I am unlikely to earn very high returns. This is a strategy that suits me personally.
However, many investors are aware of additional risk with high risk stocks, but are prepared to take them on. This is not a problem as long as you understand the pros and cons and are prepared for all eventualities.
Essentially, it is often the case that the higher the risk, they higher the potential return. Always think of the worst case scenario with your investing and be prepared for it. Never underestimate the stock market risk.
Historically there have been many stock market crashes, 1987, 2001 and 2008 spring to mind. It is often a good time to buy at the end of the crash, but think to yourself, would you be able to cope if there was a major crash tomorrow?