What are the risks of investing in stocks?

It is true that people can make their fortunes through trading in the stock market. It is a very appealing idea that you can be earning a great deal of money by doing hardly anything at all. But people often forget the risks of investing in stocks. Yes, it is true that you have the possibility of making money, but as your possibility for making money increases, so too do your risks for loosing money.

Stocks vs. Bonds
The biggest risk in investing in stocks is that a stock is not a bond. A bond is a loan or a debt that must be repaid at a certain point in the future. A stock on the other hand, holds no obligation with it. Once you buy a stock you may never see that money again. The company in which you are now a shareholder owes you nothing. As a partial owner in that company, you get to share in the companies successes but only if they decide to distribute dividends or if the company dissolves. You take a risk with your money and have to accept that you may never see your investment again and that you are the only one to blame.

Dividends and liquidations/bankruptcies not guaranteed
Shareholders will occasional be paid dividends. However, a company is not required to pay out anything unless they go bankrupt or dissolve. If your company does pay out dividends, you may never see any of the money unless you are a preferred stock holder. Preferred stock gets paid dividends first, if there are no dividends left after the preferred stock holders have been given their portion you are out of luck. In theory, you could hold on to a share for years and years and your investment opportunities will never change. Also, it is true that when you buy a stock you are a partial owner in that company and if that company dissolves you are entitled to an appropriate proportion (depending on how many shares you have). However, when a company is going through bankruptcy, naturally their worth and corresponding payoffs can be extremely low.

Loose investments
The biggest loss you can experience in investing in stocks is to loose all of the money you have invested. Although you will not be required to pay more than you have invested in a stock, you do risk loosing all of the money that you paid for that stock. Some investors are asked to invest even more money into a particular share that is failing in the hopes that with the extra money the company can get a jumpstart and the shareholder can have a stronger hope of earning back their investment. The truth of the matter is that shareholders are loosing their investments all the time. That is why it is so important to diversify your investments and to plan on loosing in a little in the hope that you will gain more. Those who do not diversify are setting themselves up for a big loss.

Also consider that if you are anticipating your stock to decrease in value you could try to sell it. Selling it could save you from loosing your entire investment. But the demand for depreciating stock is low and you may have a hard time finding a buyer who is willing to take on the risks associated with your stock. It is also possible that if you do sell your currently unsuccessful stock for a lower price than initially invested, that stock could turn around and become valuable again. In this case not only would you loose the money from your initial investment, but you would also feel the sting of selling a now valuable stock for little money.