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Guarding Against Risk

(Adapted & modified from www.getsmarteraboutmoney.ca)
RISKS OF STOCKS
​​When you invest in a stock, you could lose all of your money – in some cases, more than you invested. Before you buy a stock, understand the risks and decide if they are risks you are comfortable taking.
2 KEY INVESTMENT RISKS:
1. Returns are not guaranteed – While stocks have historically performed well over the long term, there's no guarantee you'll make money on a stock at any given point in time. Although a number of things can help you assess a stock, no one can predict exactly how a stock will perform in the future. There's no guarantee prices will go up or that the company will pay dividends. Or that a company will even stay in business.
2. You may lose money – Stock prices can change often and for many reasons. You have to be comfortable with the risk that you might lose all of your money when you buy and sell stocks, especially if you're not planning to invest for the long term. If you use leverage to invest in stocks, like buying on margin or short selling, you could lose more than you invest.
4 WAYS TO MANAGE RISKS:
1. Hold a diversified stock portfolio
You may be able to reduce the ups and downs in the total value of your stock portfolio by buying stocks from companies with different features:
~ Type of industry – While companies in one industry may struggle, companies in another industry may be doing well. For example, energy stocks might slump while technology stocks are rising.
~ Company size – Investing in a smaller, newer company can offer the potential for higher growth, but it’s usually riskier than a larger, more stable company with a long history and good track record. You can reduce your overall risk by owning stock in companies of different sizes.
~ Type of stock – Preferred shares tend to offer lower risk and returns than common shares. But they pay a fixed dividend, unlike common shares. You may want to choose both for your portfolio.
2. Invest for the long term
The stock market is subject to short-term fluctuations, as well as bear markets. But over the long term, the stock market has historically performed well. If you buy stock with money that you may need soon, you may be forced to sell in a period when a stock’s price is down. If you buy high and sell low, you'll lose money.
3. Don’t try to time the market
Trying to time the market can be a risky strategy. You may hear about a stock that is climbing higher and higher in price. When more investors decide to jump in and buy the stock, they drive prices up even more. The price can fall just as fast, though, as investors start to sell to cash in on the big gains.
Other investors make the mistake of selling as soon as a stock price falls. But you don’t lose money on a stock until you sell it. If you hold on, the price may come back up. Stocks are long-term investments with many short-term fluctuations in price.
4. Get advice if you’re not a knowledgeable investor
It’s always risky to invest when you don’t understand how the stock market works, what makes a stock’s price rise or fall, or how an investment or investment strategy works. The more you know, the more you can lower this risk. If you don't feel comfortable with your level of knowledge, a qualified advisor can help you choose stocks and other investments that meet your goals and tolerance for risk.
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