Dangers & Risks of the Stock Market

by Dennis Hartman

Most types of investments place investors at risk by posing the possibility, however unlikely, that the investor's money will disappear instead of growing over time. Some investments are more risky than others. Volatility refers to the likelihood of a particular investment, such as stock, to experience rapid changes in value. Stock includes other dangers that investors must consider before selecting it in place of, or in addition to, other investment products.

General Risk

The term "market risk" refers to the general risk of investing in stock. If the market as a whole loses value, as during periods of recession and economic decline, stockholders in all different industries and companies will see their investments lose value. Certain sectors of the economy present more market risk than others. Market risk often accompanies the possibility of high returns, which draws buyers into the stock market. Those who diversify their portfolios hedge market risk by also investing in lower-risk markets, such as bonds.

Specific Risk

Stockholders can buy products such as mutual funds, which combine many different stocks, or buy stock in individual companies. Investing in one business creates the risk that investors will lose money should the company go bankrupt, fail to manage its debt and expenses, lose ground to competitors or introduce a failed product. This is known as "business risk," and it is unique to investments, such as stocks, that rely entirely on the growth potential of individual businesses.

Timing

Data that shows the stock market rising in value over time usually refers to an extended period of time, with consistent gains measured over years and decades that outperform other types of investments. However, this doesn't necessarily hold true over shorter time periods. In investing, the duration of an investment is known as its time horizon. Investors who buy stock and expect to sell it to fund a retirement have a specific time horizon. If the stock loses value just prior to retirement, it may never recover in the owner's lifetime.

Secondary Costs

In addition to its more obvious risks, the stock market may be an expensive place to invest. Since individual investors usually can't buy stock directly, they must go through brokers and pay fees to do so. Frequent sales and purchases mean higher broker fees. Selling stock for a profit subjects the investor to a capital gains tax. Because of the large number of stocks available on the market, investors may spend huge sums of time and money researching investment opportunities and comparing options.

Photo Credits

  • Thinkstock/Comstock/Getty Images