Risks of Investing

There are many risks to investing in the stock market.  But luckily, investing is not a game of chance as much as it is a game of managing risk and reward. When the risk is less than the reward, it is an investment; when it's the opposite, then you are playing a game of chance. Putting the odds in your favor by doing research and keeping up to date on your investments will keep you ahead of the game and make you a profitable investor.

If Investing Didn't Have Risk, it Wouldn't be Investing

If there was no risk to investing, we'd all be invested fully into the stock market. The stock markets would be reduced to money printing presses as opposed to a place to buy and sell companies. The amount of risk you are willing to take is almost directly related to how much you'll receive for investing. Though there are zero risk investments, they hardly beat inflation - meaning you'll gain little ground on the spending power of the money you invest. Seeking risk is seeking profits; limit your risk and limit your profits, spread risk around, and you'll be able to get the best of both worlds.

If Worst Comes to Worst

Obviously, the biggest risk to investing is that you'll lose it all, but the probability of that happening is very low. The stock market has been around for more than one hundred years and has never once gone to zero. Companies that trade on the stock exchanges around the world are backed by assets and their balance sheets. The only possibility for a collapse to zero would be the result of nuclear war than bad investing.

Minimize Your Risks

You can greatly minimize your risks of investing by diversifying amongst many different investment vehicles with different returns. Never allocate the overwhelming majority of money to speculative investments, such as stock options and stock futures, but instead focus on proven companies that will continue to do well. The chance that an index would go broke is almost slim to none, as the global economy would have to crash for a catastrophic event such as this. In the case of a global economic collapse, your money would be jeapordized, regardless of the financial instrument.

Remember the FDIC-Insured Investments

Savings accounts, CDs and money market accounts are all FDIC insured up to $100,000, which means you're completely protected against a bank failure. Though CDs do not pay above average returns, they are great for people who want minimal risks but would still like a return greater than just a few percentage points.

Investing is the Way the Economy Moves

Without investing, even in vehicles such as your 401(k), no one would ever retire. It would be almost impossible to have an opportunity to quit working because you would need to work to keep up with living expenses. By investing, you're practically saving time for use when you need it the most. If you can grow your money faster than you'll have to spend it, your investments have served their purpose.