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Risks & Advantages Involved in Stock Market Investing

Investing in the stock market involves a number of risks. Knowing that these risks exist should be one of the things an investor is constantly aware of. The money you invest in the stock market is not guaranteed. For example, you may buy a stock in expectation of a certain dividend or the rate of increase in the share price. If the company experiences financial problems it may not live up to your dividend or value growth expectations. If the company goes out of business you will probably lose everything you invested in it. Because of the uncertainty of the outcome, you take on a certain amount of risk when you buy a stock.

Stocks differ in the amount of risks they present. For example, Internet stocks have proven themselves to be more risky than utility stocks.

A risk is a stock's reaction to news about the company. Depending on how investors interpret the new commodity, they may be influenced to buy or sell the stock. If enough of these investors start buying or selling at the same time it will cause the price to rise or fall.

An effective strategy for dealing with risk is diversification. This means spreading your investment across multiple stocks in different market segments. Remember the saying: "Don't put all your eggs in one basket".

As investors we need to find our "risk tolerance". Risk tolerance is our emotional and financial ability to weather market downturns without panic and without selling at a loss. When we define that point we make sure that we don't push our investments beyond that.

Advantages Involved in Stock Market Investing

The same forces that bring risk in investing in the stock market also make it possible for many investors to make huge gains. It is true that market volatility gives losses as well as profits, but if you have a proven strategy and stick with it for a long time then you will be a winner!

Finance & Transaction Advisory Services

The Internet has made investing in the stock market a possibility for almost everyone. A wealth of online information, articles and stock quotes give the average person the same capabilities that were once available only to stockbrokers. Now the investor does not need to approach any broker for this information or place buy or sell orders. We now have almost instant access to our accounts and the ability to place orders online in seconds. This new freedom has given rise to a new mass of hopeful investors. Yet it is not a random process of buying and selling stocks. To make profit we need a strategy for the selection of a suitable stock as well as timing of buying and selling.

Day Trading

Day trading is an attempt to buy and sell stocks in a very short amount of time. The day the trader expects to capitalize on short-term fluctuations in the stock price. It would not be unusual for a day trader to buy and sell the same stock within a few minutes or to buy and sell the same stock multiple times a day.

Throughout the day traders sit in front of computer monitors looking for short term movements in stocks. They try to join the movement before it reverses. Real day traders do not hold stocks overnight due to the risk of an event or news item triggering the stock in the reverse direction. Monitoring the minute by minute activity of many stocks requires intense concentration.

Day trading involves a lot of risk due to the uncertainty of stock market behavior in the short term. Even the slightest economic or political news can cause wild fluctuations in stocks and result in unexpected losses.

There are some people who make a respectable profit day trading. The people who probably make the most are self-proclaimed "experts" who sell books or operate web sites that cater to the day trader. The profits from the sale make it as lucrative as possible for those who want to get rich quickly. The truth is that in the long run day trading does more people loss than profit. It doesn't translate into a very good investment.