Risks of Investing in Shares
The Risk of Capital Loss
When a company is performing poorly or when the market perception of the company is negative, the share price may fall below the price which you originally paid for the share or even to zero.
Share prices can be very volatile and investors should be aware that their shares may fluctuate significantly in price in short periods. This can apply to individual stocks, sectors or to the market itself.
This is the chance that the entire market will decline, thus affecting the prices and values of securities. Market risk, in turn, is influenced by outside factors such as interest rate changes.
Sector Specific Risk
This is the risk that a particular sector experiences malaise, eg the airlines industry on news of terrorist attacks. Such periods of weakness can however provide buying opportunities, but existing investors must decide whether they are prepared to weather the storm or whether they should sell their shares in anticipation of further declines.
Risk vs Returns
- On average, shares have a high rate of return
The increase or decrease in the original purchase price of an investment
- Higher rate of return = greater risk
Uncertainty about the outcome of an investment
- Shares provide portfolio diversification
Money invested in a variety of investment tools