Taking on Risk

What Are the Risks of Buying Shares?

There is always a risk/reward relationship that comes with investments. But that should not deter you from exploring the world of stock investments. What you need though is an understanding of what are the risks of buying shares.

Most investments come with risks. In fact, everything in life comes with some sort of risk. So it is critical that one knows what their risk tolerance is and how to work around it to get the best return on your investment.

What is risk tolerance? You ask! Well, Risk tolerance is your emotional capacity to withstand losses without panicking. Determining your risk tolerance needs you to have a good understanding of your ability and readiness to digest large swings in the value of your investments.

Know Your Risk Tolerance

Different people have different levels of risk tolerance. Very few investors can stay in the market going with one decline after decline after decline. Others will build tolerance along the way. This is simply because they choose to stick to their selling price. Your risk tolerance is just as important as knowing your shoe size.

Knowing your tolerance for risk helps you take on the appropriate amount of risk for your personal profile. Obviously, this is based on your understanding of the associated risks of buying shares.

Don’t Bite More than You Can Chew

Taking on too much panic can cause you to sell your shares at the wrong time. When the time comes and you choose to sell your shares, when it hasn’t been performing well, it becomes hard to find a buyer for that share. This may result in lowering the cost of the share price.

Due to the market cycles, some shares have a higher risk and people don’t know when it’s the right time to buy or sell them. When the market goes into a strong decline, people think that they have lost a lot of money and start to sell their shares thinking that if they don’t they will lose more money. So the timing must be right and when there’s a strong decline in shares it’s a time to rejoice not to panic. By the time they realize that it is starting to rise again, it then becomes too late and it becomes a problem to find a buyer for that share.

To reduce the risks of investing, diversify your portfolio. Don’t put all your eggs in one basket. owning shares in several different companies reduces the risks relative to returns.