There are many different places that we can invest our money if we choose to but the stock market is probably one of the most popular. When we invest in the stock market we buy shares in a company and then we may get paid some dividends on a yearly or twice yearly basis and we will be able to sell the shares when we want our money back. There are risks with all investments and it is important to understand these before you decide whether the stock market is the right place for you to invest your money.
Long Term Investment
It is very important to understand that the value of investments can rise and fall. This means that you will need to make sure that when you invest money you are prepared to wait before you sell your investment. If you invest when prices are high and then sell when prices are low, you will make a loss. Therefore, you need to either buy when prices are low and wait for them to rise or just buy at any time and wait for them to rise. The markets will fluctuate and it is normal for them to go up and down a lot. However, they will tend to have a general upward direction, which means that if you leave your money invested for long enough, the value should go up regardless of the small rises and falls in the value. This means that you need to be prepared to leave your money invested for a significant period of time. At least ten years is usually deemed to be a good amount of time, although you may need to leave the money invested for even longer if you would like to make more money. If the market happens to go down after that time period then you may also want to leave your money in for longer so that you can make more gains.
Prices can Rise and Fall
It is really important to be aware that some prices may rise and some may fall and even in the long term there may be some that will never recover. This means that there is always a risk that you might buy something and it will fall in value or even become completely worthless. This is unlikely but there is always this risk and so it is extremely important to be aware of this. Ensure that the money that you are investing is money that you can afford to lose just in case you do lose it or it reduces in value. It is possible for a company to completely collapse and the shares be completely worthless so you need to be aware of this risk.
Dividends May not be Paid
Some stocks and shares do not pay dividends and with others, the payments will be determined by how well the business does and therefore may not always pay out. This means that you cannot always rely on having that money as an income and so you need to be aware of this. Some will never pay dividends as they may just not work like this, it will depend on the type that you buy. It is therefore important for you to make sure that you are aware of this and if you do want dividends, that you make sure that you research your options and pick the one that is most likely to be able to pay them. However, relying on dividends as income can be a risky business, so you need to be very careful if this is something that you are hoping to do.
Spread the Risk
It is a good idea to spread the risk when you invest in the stock market. If you just buy shares in one company and they do badly, then you could lose a lot of money. Therefore, it can be wise to spread your money across different companies as well as different industries. This will mean that you will be able to spread the risk and if there are problems in a particular company or industry, then the losses you make there could be offset from gains in other areas. Of course, there is a risk that the whole stock market may go down and most or all shares are impacted, but there is nothing you can do to protect against this apart from just waiting to sell until it recovers. Recoveries have taken longer in recent times as people seem to be more worried about stock market changes and more likely to sell if it starts to fall and not invest unless they are really sure it is rising.
Some people do prefer to keep all their money in one company because if it does really well, they gain more. They feel that with a riskier investment they will have a better chance of making a large amount of money. Although this is true, there is also a bigger chance of not making any money at all as the company could do badly and the share value could massively decrease or totally disappear. Some people are risk takers and enjoy the thrill and risk of gaining and losing money. Some people would rather be in control and do not like taking any risk. If you do not like any risk then investments are probably not for you, if you are okay with a little risk then spreading the risk could work better for you.
It is always well worth taking independent financial advice before investing. An expert will be able to guide you, based on how much money you have to invest and the amount of risk you want to take and they should be able to find a suitable investment for you. Each one of us is different and so it is not possible to say that a certain investment will be better than another as it will depend on what you are looking for.
