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Common Risks Associated with Stock Trading

Every trade comes with its own risk. The stock trade has its' also. This article explains the risks of stock trading.

Economic Risk

An unstable economy is a risk to stock values. Around the early 2000s, the stock market saw a great level of turbulence, especially after the September 11, 2001 attack.

The stock market indexes steadily lost significant percentages, and in 2008, there was the great financial recession which heavily affected stock trade. It has been quite a journey for the stock market to regain its stability since these events. And in 2020, the world is faced with another pandemic that is increasingly affecting financial institutions and economics at a global level. Young investors are often advised to hunker down and seize the hidden opportunities of downturns strategically.

Volatility Risk

Stocks are volatile assets, and their price may shift significantly in price in a short time. And, also, external factors can influence some exceptional market risk. Here, the whole market could decline, and the stock prices will be affected too. Also, not the entire market has to fall but the sector could. For example, a specific sector may experience downturns. Well, while some will catch the losses but at the same time, such periods are a great chance to buy stocks at a lower price. You see, the stock market is a zero-sum game. You can only profit when some others lose.

Also, the risks of investing in the stock market could come from the nature of the stock.

Inflationary Risk

Inflation, if it's too high, can destroy value and create recessions. Even though inflation is under our control, the cure of higher interest rates may, at some point, be as bad as the problem.

Stocks are the best protection against inflation since companies can adjust prices at the inflation rate. A global recession may mean stocks will struggle for a protracted period before the economy is strong enough to bear higher prices. It may not be a perfect solution, but that is why even retired investors are advised to maintain some of their assets in stocks.

Older investors are in a tighter bind. If you are in or near retirement, a major downturn in the stock market can be devastating if you haven't shifted significant assets to bonds or fixed-income securities. This is why diversification in your portfolio is essential.

Market Value Risk

This is what happens when the market turns against or ignores an investment. It happens when the market collapses because good stocks, as well as bad stocks, suffer as investors stampede out of the market. However, highly experienced investors find this a good thing and view it as an opportunity to load up on great stocks at a time when the market is not bidding down the price. On the other hand, it doesn't advance your cause to watch your investments flatline month after month while other parts of the market are going up.

Don't get caught with all your investments in one sector of the economy. Choosing to spread your investments across several sectors gives you a better chance of participating in the growth of some of your stocks at any one time.