5 Risks Involved In Buying Shares

Shares are most times long-term investments that are easy to trade and require only a small amount of money to invest. When the term “shares” is used, it refers to a slice of ownership of one or more companies.

Buying shares from a company is a good investment, however, regardless of how good or successful an Investment might be, it always comes with its risks.

Investment risk is the potential of losing some or all of our money and it is an inherent part of investing. Generally, investors must take greater risks to achieve greater returns; however, taking on additional risks does not always lead to greater returns.

Investors who do not bear risk very well have a relatively smaller chance of making high earnings than do those with a higher tolerance for risk; therefore, it is crucial to understand that there is an inevitable tradeoff between investment performance and risk.

Not all investment decisions will turn out as expected; however, there are specific risks that investors should be aware of when investing in certain asset classes such as buying shares.

Some of these risks include:

The Risk of Capital Loss

This is a general risk that can happen at any time, this is because, when a company is performing poorly or when the market perception of the company is negative, it may be difficult to find a buyer for your shares at the price you want to sell them. Moreover, the share price may fall for low the price, which you originally paid for the share or even to zero.

Volatility Risk

The prices of shares can be very volatile and fluctuate rapidly from time to time even within short periods.

This can apply to individual stocks, sectors or to the market itself. Therefore, investors must accept the fact that the value of their shares may fluctuate significantly. Market risk can influence some sectors more than others, thereby affecting the performance of an individual share.

Sector Specific Risk

This is the risk that is associated with a particular sector, which means, only that sector experiences it. For example, the railway industries experiencing terrorist attacks.

Such experiences affect the shares of the investors and existing investors must decide whether they are prepared to weather the storm or whether they should sell their shares in anticipation of further declines.

Exchange Rate Risk

Sometimes, investing in a foreign currency leaves you at the risk of losing value when your profit is converted to your local currency, due to movements in the exchange rates between the two currencies.

Timing Risk

Another crucial risk involved with buying shares is buying or selling at a wrong time. Because of market cycles, some shares have a higher degree of risk when the overall share market has risen sharply and is set for a reaction.

In addition, not all sectors of the market follow the same price cycles, therefore it is important to understand business cycles and how different companies perform during different phases of the business cycle as this can help to manage the effects of timing risk.

It is critical that investors understand the effect that these risks can have on their investments.