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Minimizing The Risk Of Investing In Stocks

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The Single Biggest Risk of Investing In Stocks

risk of investing in stocks

People have an irrational fear of investing in stocks because they hear the horror stories about people who lost every penny they had when their stock values plummeted. What they do not realize is that these stories are about people who failed to follow the most basic rule of investment: Diversify. As long as an investor keeps a wisely diversified portfolio, he or she has little to fear about catastrophic loss. Risking everything on one endeavor is taking the biggest risk of investing in stocks.


How to Minimize the Risk of Investing In Stocks

There is a hierarchical pyramid that demonstrates the scale of risk of investing in stocks. If you want to get ahead and make money in the stock market while protecting yourself against serious losses, then you simply need to spread your investments up and down this pyramid. A good stock portfolio respects the risk of investing in stocks and has a mixture of high-risk and low-risk investments in it.

At the bottom of the pyramid are the low-risk investments. These are government bonds, money market accounts, certificates of deposit and just plain cash holdings. To a cocky, new investor these may sound too timid. However, every wealthy investor has a portion of his or her wealth invested in these safe assets.

In the middle of the pyramid are the investments with a certain element of risk. These are investments in real estate, mutual funds and stocks issued by large and small cap companies. They each carry the possibility of significant returns as well as losses.

At the top of the pyramid are financial instruments known as futures and options. These are investments utilized by experienced traders who have spent their lives investing in the market. These assets demonstrate the most risk of investing in stocks.

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