Why are investments so risky?

Many people are put off investing because they perceive putting their money into stocks as risky. Find out how you can mitigate some of that risk, if you wish.

Whether you have savings you want to see grow, or you’re looking to build a nest egg for your future, investing in the stock market is a popular choice for many people.

But if you’re new to investing it can seem confusing – and you could be put off by horror stories of people losing money on stocks.

Trethowans
Trethowans

But, while investing shouldn’t be seen as a get rich quick scheme, you can invest without the risk of losing everything. Investing can allow your wealth to build, and you can withdraw your funds at any time when the numbers seem good. 

To help you learn more about investing and decide whether it might be for you, we look at the different types of risk, how you can diversify your portfolio to limit your risk, and why brokers can help you to make wiser investment choices.

What’s your investment risk profile?

Some investments are riskier than others. So if you’re going to start investing your money, you need to be aware of the different types of investment so you can decide which is the best fit for you at any given time.

High risk and low risk investments both have their pros and cons. Yes, a high risk investment stands more chance of not working – and you potentially losing money. But higher risk investments also have a greater chance of earning you more peony if they work out.

Lower risk investments, meanwhile have, as their name suggests, less risk of underperforming. But the potential gains from lower risk investments are usually lower than higher risk investments. So there’s a price to pay for caution.

Some well known high risk stocks include venture capital, initial public offerings (IPOs), and cryptocurrency. And common low risk stocks include savings accounts and bonds, as well as dividends, and physical assets like real estate. 

When deciding where to invest your money, you need to understand what your approach to risk is.

Are you someone who is prepared to take the risk of your investment underperforming in return to the possibility of greater returns? Or do you need money quickly, and are prepared to take more of a gamble to get it? In which case, higher risk stocks may be a good choice for you.

Or are you a more cautious investor? Do you hate the idea of your investment not performing well? Or are you someone who wishes to invest in a more rock-solid investment over the ling term, and are prepared to forgo the potential gains of a higher risk investment for more certainty and security? If so, lower risk investments would suit you better.

You might even opt for a hybrid of the two, spreading your investment between the security of some lower risk investments, and some higher risk options.

Whatever way you decide to go, , make sure that any stock you’re interested in has had the rule of 72 applied to it. This is a tried and tested formula for determining how long it could take an investment to double in value, thanks to the use of fixed interests. 

How to assess potential loss

When it comes to investing, in both small and large scale terms, it’s very common to see a loss. In fact, it’s often what the experts tell you to expect, simply because of how quickly the market can change, and how fast a line of stock can lose its value. 

However, when you think about the market or the exchange you’re investing in, it’s not necessarily a good idea to think about value as being volatile.

When something is volatile, yes, it has an increased risk of rising or plummeting, but it doesn’t necessarily mean you’re going to lose out. It just means there is more potential for risk. 

If you want to know just how likely a loss could be, you need to think in percentages. You need numbers to work off of here; if you purchase stock or another kind of asset that is worth a certain percentage, the idea of it bringing in a return worth any less than that percentage is where the risk is present. So make sure you know all about underperforming assets.

Of course, there are ways to try and predict what could be a good investment, and what might be a risk not worth taking at all. One solution is to base your outcomes on spread betting uk, because the global stock market takes every single nation into account when determining value.

While no one can give you confident, real information on what value a stock is going to hold next month or year, there are ways you can hedge your bets. 

Why you should diversify your portfolio

We already talked about taking a hybrid approach to risk and spreading your investments across stock with different risk profile. But it’s also wise to take a more diversified approach to your portfolio in general.

Think about it – if you put all your eggs in one financial basket, then your financial fate lies with that one investment, which is dangerous.

Instead, it’s generally wiser to diversify your portfolio and ensure that your investments work as a system. Ideally they’ll be able to offset each other. So if one tanks, another can quickly take its place in terms of the overall value. 

A broker will help you to understand and invest in the stock market

One thing that puts off many potential investors is the complexity of the stock market. There are so many different types of stock. So many numbers. And so little certainty. It can feel like you need to be a financial expert to go anywhere near investing in stocks.

To try and simplify it a little, stock is split into two categories, known as common and preferred. Common stock represents a portion of ownership, whereas a preferred stock gives you more access to a company’s dividends and actual profit. However, the difference between the two can seem entirely negligible until you see the evidence! 

But even with these two categories outlining the types of stock you’ll want to have in your portfolio, it can be very hard to know what the market is really doing. That’s why you generally need a broker who knows what they’re doing, and can secure the stocks for you.

They’ll find out your risk profile, and any investment preferences you might have – for example ethical and sustainable investing. Then they’ll suggest funds which match your interests and needs.

You may even fid that once you start investing that you become more interested in the subject, and gaining your own financial knowledge.

Investing can be risky. But as you can read, there are ways to mitigate the potential or the impact of any loss. And it can also deliver short and long term returns. You just need to make wise decisions with the help of an experienced broker.

Photo by Jamie Street