A lot of people are choosing to use the stock market as individual traders these days. It used to be that only companies that were looking for investments, such as pension companies used the stock market but then individuals started using it as well. There has been criticism of this saying that individual traders panic too quickly and buy and sell too often which means that the market is more uncertain and can lead to problems with it. However, there are many different reasons for stock market fluctuations and it can be difficult to put it down to one or a few specific incidents. This means that there are still a lot of individual traders and so it may be that you are considering it as well. You may, however be concerned about the risk of stock market trading.
What are the risks?
When you are trading on the stock market there is a risk of losing your money. When you buy stocks, you are buying a share in a company and the value of that company share will change. You will hope that the value will increase and therefore when you sell your shares you will make some money. However, there are risks. The value of stocks can go up and down for all sorts of reasons. This means that the value of your investment can go up and down and therefore if you buy when the shares are expensive and sell when they are cheap you will make a loss. You could find the shares even become worthless or once you take into account the fees of buying and selling you have nothing or very little left. Although this is an unlikely situation, if you only spend a little bit of money then together with the fees, you are unlikely to make anything.
Of course, most people think that when they buy shares, they will increase in value and they will make a profit. This is because the stock market as a whole increases in value year on year unless there is a big crash. However, this is an average figure and so if you are buying an individual companies share, it may not follow this pattern. The company may go bankrupt and the shares be worthless or really struggle and reduce the value of the shares for a long time. The industry the company is in could struggle and this could also have a negative effect on your share values.
How to reduce risks
There are ways that you can reduce the risks though. If you buy a spread of shares across different industries it can increase the chance of you making money. This is because if one industry has a problem that causes their prices to go down, it is unlikely to affect the others as well and so the impact will be lower. Of course sometimes there is something which will affect the whole of the stock market to change and then where you hold your shares will not be relevant, however, it is more likely for individual industries and companies to fluctuate. This is why spreading your investment is considered to be lower risk.
Some investors use a financial advisor to help them choose where to invest. This is because they feel that the advisor knows more than they do and can therefore give them ideas on what to invest in, in order to make the most money. It is wise to let your advisor know how much risk you are willing to take. This is because the higher risk investments are more likely to make higher profits if they are successful but they can also make the biggest losses. Therefore you need to decide whether you would rather try to get a bigger return but risk losing more money or take a lower risk but potentially not make so much money.
Can I risk my money?
It is always worth considering whether you have money that is available to risk. You need to think about what you use your money for and whether you need money to pay bills and cover your daily expenses. This is really important because an investment is risky and you could lose the money. Also, to give yourself a better chance of making a profit, you need to invest money for a long time. This is because the stock market fluctuates a lot and to even out the effect of these fluctuations and give it a chance to increase in value you need to keep the money invested for a long time. His does not mean a few weeks, but years if not decades will be how long it needs to increase significantly in value. If you use money that you are likely to need quickly, then you could end up having to sell the shares when they are not worth very much and then with the fee of selling them, you could end up with very little money at all left.
It is up to you to think about whether you think that you will need the money or not. You know what your finances are like and whether you normally have enough money to manage each month. You will also know whether you have a lump sum of money that is enough to invest and whether you will be happy with it tied up for a long time. It can be difficult to predict what might happen in the future and whether you will have the money that you need to be able to invest. However, you should be able to look back, consider what your future may hold and in particular consider your job security and earning prospects, which should all help you to decide whether you will have enough money to manage on.
The most important thing is to make sure that you do not expect a huge return in a very short term. This is extremely unlikely to happen and therefore you will need to be prepared to be patient and wait before you get a good return from your investment.