risk and danger

Risk and Volatility in the Stock Market

Stock market trading can be a difficult and risky process. Investing here is not for the faint of heart, especially for those with less disposable income. Some stocks are clearly a higher risk than others.

Consequently, it is important to ask yourself whether you are willing to venture into some risks with your money to determine if the stock market is right for you

If you are a risk adverse person whose stomach churns when taking chances with money, then you should probably avoid the stock market altogether. However if you don’t mind at least some risk, investing at least a small portion of your money might not be a bad idea.

risk and danger

Of course there are innumerable investment options outside the stock market that are lower risk, such as CD’s and mutual funds. So it is not like publicly traded stocks are your only investment choice. Don’t allow yourself to be pressured into ANY investment you’re not comfortable with.

Business risk –Some business operates in industries that are highly volatile or competitive in nature. Think of the personal computer hardware industry. The profit margin can be very low and unless you have strong distribution channel or retail network, it is very difficult to stay viable in this market. Airline industry is also another highly competitive industry. It needs very high capital expenditure to stay in the business and the operating cost is also very high due to the high volatility of jet fuel cost. Airline needs to run a highly efficient operation and strong marketing strategies in order to generate decent profit. On the other hand, public transport operator such as mass transit operators typically have very stable business environment even during an economic downturn. If we understand the business the company operates in, it can help to significantly reduce their level of risk exposure.

Corporate governance —It is common knowledge that behind every good company lies a strong and capable team of people managing the company. Is the business run by capable and honest leaders with a high level of business ethic and integrity? Enron is an example of a company that does not seem to have a clear and transparent corporate governance. Such information may not always be easily accessible. However, one may gather sufficient knowledge in this area by analyzing company financial report, and attend annual shareholders meeting.

Market valuation Risk– When a company without any clear sign of having a significant growth catalyst has its share’s priced substantially higher than its fair value, then you would probably want to investigate more. If this is a case of market speculation then you will want to avoid this company. If you have done your homework and understand, example the margin of safety, then you could completely ignore market valuation risk, so long you have the required margin of safety built into the share price.

Some of the stock market risk factors include, Business Risk, Corporate Governance Risk, and Market Valuation Risks. We could significantly minimize our risk if we understand them and take action to rein them in. Remember that one of the golden rule in stock investment is not to lose money.

Do You Enjoy the Thrill of Gambling?

If you are the type of person that loves taking risks – for example, playing casino games – then you would likely enjoy trading volatile stocks rather than going for less risky alternatives. Volatile stock options are more unpredictable than the rest of the market, but some of them also hold the potential of being a gold mine.

Before drooling at the thought of winning it big with stocks, high risk investments also have a lot of potential negative consequences. So on the one hand, you could wind up with a lot of money, but on the other, you might well lose most of your stock investment. And with risky stocks, there is often almost no way to accurately predict the outcome.

For the wild ‘n crazy, it is easy to become addicted to the short term trading options, known as “day trades.” These can be every bit as addictive as gambling in a casino, potentially leading to devastating consequences.

Keeping Your Emotions in Check

It is very easy to become too involved with gambling and just lose everything you have. You might tumble into major financial troubles when taking on too many large risks. If you ever get to a point of finding yourself not being able to stop making risky investments, then you may need to seek help just as you would for a gambling addiction.

If you’ve had problems with gambling in the past, you definitely should try to stay away from the risky day trade investments. They are never a good choice for someone who is already a high risk for a gambling problem.

Day traders have such a high potential for addictions to their trading that there is even a specific support group in Gambler’s Anonymous for people addicted to day trades.

Having thrown up some red lights above, the risks of the stock market don’t mean you should avoid it completely, but they do mean you need to be careful with ALL decisions you make when investing money in stocks.