When you invest in stocks, you also have
to be prepared for a range of risks posed by the company issuing the stock and by what's happening
in the stock markets, the U.S. economy, and the world at large.
Management risk is the possibility that a
company's executives will make decisions that jeopardize the company's
profitability.
Stock is also vulnerable to market risk —
the fact that the stock market as a whole, or an industry or sector
within the market, can stall or drop in value at any time, dragging
the value of your stock portfolio down with it.
And on a broader scale, the economic risk
of recession and political risks, such as an oil embargo or armed conflict,
can also have a negative effect on stock prices.
Managing risk
One thing's for certain: Your stock
investment will drop in value at some point. That's what
risk is all about. Knowing how to tolerate risk and avoid selling
your stocks off in a panic is all part of a smart investment strategy.
Setting realistic goals, allocating and diversifying
your assets appropriately, and taking a long-term view can help
offset many of the risks of investing in stocks. Even the most
speculative stock investment, with its potential for large gains,
may play an important role in a well-diversified portfolio.
