What Is “Risk”?

investor risk

The definition of risk is “being exposed to certain danger”.  In the financial markets, it may be defined as “the possibility or likelihood of loss”.

So in investing, what are the different types of risk?

1. Market Risk.  Stocks will tend to move in the direction of the overall market.  So if the market goes up, your stocks are likely to follow – as is the case when the market goes down.

If we are in a bear market, in which there are more sellers than buyers, the stocks you own will follow.  They may have rock solid businesses, and make a ton of cash.  However…no stock is immune to market risk.

2. Stock risk.  This, in my opinion, is more dangerous than market risk.  It’s the risk of losing money because there is something fundamentally wrong with the company.

For example, Bed Bath & Beyond (NASDAQ: BBBY) has been a poor investment for the last five years.  Here are the reasons why:

1. Amazon has significantly disrupted their business, and they haven’t been able to fend them off like Best Buy (NYSE: BBY) has successfully done.

2. They have been forced to close non-performing stores, and they’re getting squeezed because they have to continuously lower their prices.  Lower prices mean lower profits.

3. Poor management.  Bed Bath and Beyond’s management has purchased billions of dollars worth of stock at significantly higher prices.  Their capital allocation has been abysmal.

As an individual investor, these are the risks you face: market risk and stock risk.  At some point, you will experience both, and it doesn’t mean that the stock should be sold.  Evaluate the situation.  Determine whether it’s a market issue, or company-specific.  Even if it is company related, that doesn’t mean it can be fixed.

Just know what your risks are.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)

 

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Don’t Get Bit By Bitcoin!

The other day, someone asked me what I thought about investing in bitcoin or other cryptocurrencies.  The person who asked is someone that has never invested in a mutual fund or stock, and now they’re asking me about bitcoin!

STOP!!!

I am a big believer that some cryptocurrencies are here to stay.  However, at the present time, I will say this to you with certainty: Don’t invest in bitcoin unless you are willing to lose 100 percent of your money.

Bitcoin has captured the fancy of Joes and Janes all over the world.  It has had a meteoric move, its value going from around 10 cents to as high as $17,000.  However, in my view, it is more gambling than investing.

For one thing, with bitcoin, the easy money has already been made.  Those who got into it 2 or 3 years ago have made a fortune.

Also, we have no idea what the price of bitcoin is going to be in a year, 2 years, or 5 years.  It could be $100,000, $1 million, or 1 penny.  Part of bitcoin’s appeal is the fact that it is not controlled by any central bank; it is a transaction between 2 people, and you don’t even know who is on the other side of the transaction.  It is not protected or backed by any government, and its value is based merely on what people are willing to pay for it.

Listen – bitcoin is currently a “mania”.   And like all other manias in the past, it will crash.  People gravitate to get-rich-quick schemes all the time – this is no different.

Remember the dot-com boom?  In 1999, every Tom, Dick and Harriet invested in any company with a “dot-com” at the end of it: companies like Pets.com, Toys.com, and others that are long gone today.

In contrast, the value of a stock is based on the profits and growth of a real business.  It is therefore possible to make projections with some degree of confidence.

Instead of allowing yourself to get bit by bitcoin, set your sights toward real investing.  Learn how to get started in my e-book and at The Motley Fool.  Share your experiences, thoughts and questions in the comments!

Until next time…

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)