Why Stock Market Investing Isn’t Risky
There is a myth in the personal finance world that the stock market is incredibly risky. Lots of people never get started because they feel that the second they buy their first stock, the market will completely collapse and wipe out their life savings.
Technically, nothing is impossible. However, the odds of something like this happening are so rare that this is like refusing to go outside because you don’t want to get struck by lighting. As long as you’re smart and safe with your investing, there is minimal risk in losing all of your money.
This article will explore why stock market isn’t risky.
Basics of the stock market
One of the reasons that people are nervous about stock market investing is because personal finance is never taught in schools. This means that lots of people just simply don’t understand much about the stock market because they were never taught!
If you have never studied personal finance or the stock market, here are a few of the basics:
- A stock is just a sliver of ownership in a company that people are able to buy. If you buy a share of Disney stock then you’re technically a part-owner of the company (although a very, very tiny part).
- A stock exchange (or stock market) is where shares of public companies can be bought, sold, and traded.
- Stock prices go up or down based on the laws of supply and demand. The more people that are buying a stock, the higher the price will go and the more people that are selling a stock the lower the price will go.
- Investors make decisions on whether or not to buy shares of a company based on factors like: company revenue, new product announcements, growth projections, etc.
The stock market is essentially a microcosm of the entire United States’ economy. If the stock market is going up, it means that the economy is growing. There are most likely more companies being created, companies are earning more money, and hiring more people.
However, when the market is going down, it can mean that companies are struggling, making less money, laying off employees.
This brings us to our most important tip when it comes to stock market investing.
Think of investing as a long-term strategy
The U.S. has been the world’s biggest economy since the 1920s and has been one of the fastest-growing since it was established.
Sure, it’s not always smooth sailing and there might be events that create a recession like a war, the Great Recession, or the coronavirus. However, if you look at a longer timeline, the stock market has always recovered from a recession in at most a few years. Check out this entire timeline of the S&P 500 to get an idea of what we mean.
Ways to minimize risk
As long as you’re smart with the way that you invest your money, there is nothing to worry about. One of the best ways to do that is to diversify your investments. Here are a few good ways to do that:
Invest in Index Funds
These track the prices of a few hundred stocks at a time, instead of just one.
Don’t invest in just one company
If you prefer to buy individual stocks, you should have at least 20-30 in your portfolio to be properly diversified.
Invest in different industries
If you only own shares in airline companies, you’ll be in trouble if the entire airline industry collapses.\
Invest in different assets
We hope that you’ve found this article valuable when it comes to understanding why stock market investing isn’t as risky as it seems. If you’ve enjoyed reading this, please subscribe below to get alerted of new articles as we write them.