Before you dip your toes in the stock market, be sure to weigh the potential risks and benefits.
- Higher Risks attached with returns: Investment in stock market is subjected to many risks since the market is volatile. Your heart races every time the market falls. The share price of a company goes up and comes down so many times in just a single day. These price fluctuations are unpredictable most of the times and the investor sometimes have to face severe loss due to such uncertainty. When investing in the stock market, the higher the return the greater the risk of losing money. Stock market prices are directly correlated to the issuing company’s earnings. When a company is experiencing financial difficulties, the price of the stock can decline rapidly. If the majority of the market is experiencing loss and leaving the market because of economic factors, you may find it difficult to sell your shares to someone else. This is clearly evident because right now the whole world is facing enormous economic difficulties due to pandemic situation and it has adversely affected the stock market too.
- Stockholders paid last: Preferred stockholders and unsecured creditors get paid first if a company goes into liquidation due to insolvency. A well-diversified portfolio should keep you safe if any one company goes under. Owners of common stock often get nothing when a company enters liquidation, since they are last in line for payment. Moreover, while chances of a large failure are not common, it can take years for the market to recover from the brunt of a crash.
Studying the financials, due diligence reports, and other such statutory compliance will provide information to a greater extent about the company’s financial health and if they have any plan to file insolvency if their debts are already piling up. Moreover, post insolvency if the companies get better insolvency resolution plans then also, the money will be safe.
- Time consuming process: If buying stocks on your own, you must research each company to determine how profitable you think it will be before you buy its stock. Investing in stocks and then monitoring their movements is a time consuming process. You must learn how to read financial statements and annual reports and follow your company’s developments in the news. You also have to monitor the stock market itself, as even the best company’s price will fall in a market correction, a market crash, or bear market. It is not easy to earn 30% returns without devoting time. Money can’t be earned without consistent efforts and patience.
- Brokerage Commissions Kill Profit Margin: Every time an investor buys or sells his shares, he has to pay some amount as a brokerage commission to the broker, which kills the profit margin. There are some brokers who charge higher brokerage fees than usual. If you aren’t aware of brokerage rate you might select the wrong broker where you would require paying higher brokerage charges.
- Emotional roller coaster: Stock prices rise and fall second-by-second. Individuals tend to buy high, out of greed, and sell low, out of fear. The best thing to do is not constantly look at the price fluctuations of stocks, just be sure to check in on a regular basis.
- Professional competition: Institutional investors and professional traders have more time and knowledge to invest. They also have sophisticated trading tools, financial models, and computer systems at their disposal. Novice traders jump into this swamp named stock market without proper knowledge and analysing techniques.
- Impacted by the global economy: With the advent of globalisation, the world has become a single economy. The financial markets across the globe work in sync. We are connected with the world through various businesses. Therefore, every company is connected directly or indirectly to another company to fulfil their own business purpose.
For that matter, US economy is the largest economy in the world. Whenever we see any negative news triggered from the US markets, it could largely affect the global markets, especially in the short term.
For a clear view, let’s take the example of the Crash of Housing Market in 2008 that influenced almost every country’s economy. The collapse of the housing bubble in the US was a global phenomenon, with real estate prices down from the Irish, Spanish coast to Baltic and even in parts of northern India. The stock markets went down sharply and also the overall housing price started to drop, which created huge tension around the world.
If we look at the equity markets, it can be impacted by several factors like the flow of information, news, events, natural phenomena, economic aspects and other factors. Though the Indian economy has been able to hold its own even in the face of the global economic meltdown, it’s not reasonable to think that India will remain completely unaffected. Investors become wary and pull out from investing in stocks.
- Lack of Knowledge: Investors who don’t have proper and enough knowledge of stocks may have to bear heavy losses. As they are not aware of which stock to buy or sell and when to buy or sell. Many amateur investors lack the sincerity, dedication, will to invest their time learning about stock market first before investing. They assume since they have the money and will, they can make money out of stock market.
Don’t let the negatives bow you down. You can overcome them if you do some due diligence before investing in stocks. If you don’t have the knowledge, get a financial expert to help you. And be patient because it takes time to get good returns from the stock market. However, you can sure you will get the right returns in the long term.
As investors near retirement, the amount of stocks in the portfolio should be reduced. Investors who are close to retirement age can no longer afford to take chances with their money, and that means moving a significant portion of their retirement funds to safer and more stable investments.
Learn to earn!!