Video: Introduction to Stock Investments April 9, 2021
Introduction to Stock Investments
Are stocks risky? Why would I want to invest in stocks? Blaine Carr provides some stock basics.
You’ve probably heard about hot stocks. Maybe you’ve experienced a stock markets crash. Do you feel like you want to make some money, but are a bit intimidated? Nothing to fear, I can help.
Blaine Carr here, and I am a Senior Wealth Advisor with Petersen Hastings, a Fiduciary wealth management firm. I will break down the major risks stock investors face, as well as why you should consider investing in the stock market.
You might recall from a recent episode that a share of stock represents an ownership stake in a company. An investment in stock is made with the expectation the company will be profitable, appreciate in value, and eventually pay out a portion of earnings in the form of a dividend. There are thousands of publicly traded companies around the world you can invest in. Let’s take a look at the risk and rewards.
Business risk is the most basic on this list. You can lose money if the specific company you invest in struggles.
Industry risk is similar, but a bit broader. You might invest in a company in the retail sector and that investment can lose out if the retail industry is sluggish.
Sometimes the overall economy is not doing well. People don’t spend as much money when they don’t have jobs or are afraid of losing their jobs. Economic risk can cause many of the companies not to perform well.
A company might be doing fine, yet catastrophic event like 911 or COVID-19 causes the overall stock market to become less attractive to investors. This is known as market risk and can result in falling stock prices across the entire market.
Government regulations can certainly help the economy, but governments tend to overregulate. New regulations might increase taxes, raise costs, or cause other business constraints.
High inflation can be a strain on the economy and therefore is a risk to stocks. Businesses will experience higher costs of labor and other inputs and might not be able to pass on these higher costs to the consumer. Keep in mind that inflation tends to eat away a higher percentage of returns for bonds and cash than for stocks. For this reason, stocks can actually be a great hedge against inflation over the long run.
The stock market doesn’t favor rising interest rates. Companies like to borrow at low interest rates. Higher rates result in more money spent on paying back interest.
Liquidity is also a risk factor. There could be many sellers and few buyers for a particular stock. You might be forced to take a low price for that stock if you really need to sell at a bad time.
Foreign stocks have currency risk because these investments are held in the home currency of the company. The return of that stock is impacted by the exchange rate of the foreign currency back to the investor’s home currency.
So why invest in stocks if they have all that risk? The simple answer is REWARD. If stocks didn’t carry this risk, an investor wouldn’t stand to make much money. If you take on low risk, you should expect a low return. And you can see from this chart, the extra risk from the stock market has greatly rewarded investors over the long term. Also, many of these risks can be mitigated. You can diversify amongst thousands of companies of various industries, sizes, and countries. The best way to do this is through low-cost mutual funds or ETFs. Also, the sooner you need to sell your investments, the less you should put in stocks. You can put the rest of your money into bonds and cash because they tend to be more stable in the short term.
Do check with an experienced wealth manager before you invest. Give me a call and I’d be happy to discuss investing with you. Also, I encourage you to check out our additional insights at www.petersenhastings.com. Come back next time and I’ll talk about risk tolerance.