Evaluating Stock Risk
For a long time, the stock market was viewed as a way for people to make a lot of money in a short period of time provided they were lucky or knew how to choose the right stocks. Unfortunately, the end of the “dot com” craze in the early and mid 90's proved yet again that the stock market was also an excellent way for investors to lose everything if they aren't careful. Stock scandals such as the WorldCom and Enron problems have further emphasized this point since then. It is still possible to make money in the stock market, though it takes patience, common sense, and the ability to recognize the risk inherent in any investment and react to changes in the market accordingly. Defining risk in the stock market There is always risk when it comes to investing your money, especially if you're investing it into shares of stock that are issued by various companies. The events surrounding the WorldCom and Enron scandals have shown that even companies that seem stable and secure can have risk involved when you choose to invest. The risk that is referred to when people talk of stock risk is an estimation of the chance that you're going to lose money in a particular investment compared to the chance that you're going to make money. A low-risk stock is one where you're much more likely to make money than you are to lose it, whereas a high-risk stock is one where you're much more likely to lose money than to make it. Of course, the higher the risk of the stock, the more money you stand to make if the investment is handled well and you manage to sell when the stock is high. Low-risk stocks Low-risk stocks are generally stable and consistent, even if they're not as likely to show a large increase at any given time. These stocks are generally issued by companies that have a large amount of brand recognition and who show increases in value slowly but surely over time. Of course, some low-risk stocks are also smaller companies that provide enough services and products that their investment values are slowly climbing but are hindered by the fact that they aren't as well known as some other stocks. Using low-risk stocks in your stock portfolio can help to provide some security against losses that might be encountered with higher-risk shares, since they tend to be much more stable than other shares that are more volatile. High-risk stocks High-risk stocks are generally those that start growing rapidly and are likely to peak and fall quickly, or that are popular but that have legal or financial problems brewing in the company's future and are likely to plummet in value once that comes to the forefront. While high-risk stocks are hot they're hot, but once that period is over they cool down rapidly. These shares are great for adding value to your portfolio, but care must be taken to make sure that you aren't caught up in the drop in value that is usually looming in the future of high-risk investments. Minimizing risk In order to minimize the risk of investing in high-risk stocks, it's important to keep a close watch on the market and the value of your high-risk shares. It is generally also a good idea to match your high-risk investment with lower-risk stocks to help bear some of the burden of any losses that you might suffer, in addition to more secure bonds, precious metal investments, and industry-wide index investments. You may freely reprint this article provided the following author's biography (including the live URL link) remains intact: About The Author
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