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April 9, 2019

Top Risks Associated with Stock Trading

No one said you’ll get rich overnight while investing in stocks. There’re tons of risks in this business and learning how to manage them will help you a great deal. You can also learn how to overcome these risks by joining investor forums such as Investors Hangout.

In this article, we’ll take a closer look at some of the risks you’ll have to counter when trading stocks.

1.    Inflation

Similar to tax, this is another necessary evil. It slices value and worst of all it creates a recession. Since back in the day, investors use precious metals such as gold and real estate as hedges against the wrath of inflation.

With a fixed income, you’re bound to face the worst side of inflation since it slices the value of the currency, which also means you cannot buy the same product for the same amount of money as before. 

However, stocks can be a way out when it comes to protecting your investment against inflation. This is because once inflation hits, companies will raise the prices according to the inflation rate.

2.    Economic Risks

This is one of the most known risks in investments. The economy can slip and that is bad for business. Once it goes bad, recovering from the downfall can take a long time.

As a young investor, the best way to take advantage of these downfalls is by increasing your stake in a solid company since these times present the perfect opportunity. Furthermore, you can invest in overseas markets in case the local stock market takes a hit.

Nevertheless, in cases such as the 2008-09 collapse, you may not have much of a choice. Older investors may be in a difficult position, especially if a huge percentage of their assets fall in stocks. Shifting to fixed income securities or bonds may shelter you from economic downturns.

3.    Being Too Careful

While there’s nothing wrong with being a conservative investor, reaching your financial goals will be a dream if you never take on any risks. Normal doesn’t cut it in today’s world. You must be aggressive in trading and investments in general. 

However, it’s never advisable to fly blind, especially in the volatile world of stocks. Therefore, it’s vital to do your homework and take calculated risks.

4.    Market Value Risk

This type of risk occurs when the market ignores your stake or turns against it. This happens when the masses run off to catch the newest idea on the block and leave behind several good companies but not as exciting as the new ones.

As an investor, you may also face this risk if the market collapses. A collapse usually affects all investors due to the sudden exit of investors.

As much as this may be a negative factor, many investors look at it as an opportunity to increase their stake in good companies. However, it’s not advisable to sit and watch as your investment plummets to the ground as others sky-rocket.

The best way to overcome this risk is by investing in multiple industries. This way, you have a better chance of growing a section of your portfolio at any time.

Over to You

Now you know the various types of risks associated with stocks. Understanding these risks allows you to maneuver turbulent times. This will, in the long run, allow you to hit your financial goals without too much of a hassle.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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