The Stock Market Investment Risks - Essay Sample

The stock market is usually seen as a channel for the wealth creation and source of capitalism. Despite acting as a platform for brokers to engage each other in the trading of shares, the stock market investment has a wide range of benefits which include: benefits of a growing economy enjoyed by the stock owner. Corporate profits and earning grow as the economy grows. This growth in the economy increases consumer demand; which in turn improves the company the earnings and this translates to increased income to the stock owner. Utility sectors offer investors reliable and robust income flow. Many small companies are increasingly offering attractive dividends to stock buyers with their aim to increase the company's capital base. These attractive dividends translate to high income for stock investors.

The stock market investment enables an investor to stay ahead of inflation. Inflation is a major concern when it comes to investment. This is because changes in inflation largely affect a variety of assets in different ways. However, it is historically known that stock investment cautions the investor against the effects of inflation. In the long run, revenue and earnings of a company increase at an approximate space as inflation and therefore stock prices rise along with the general price of consumer and producer goods, with an exception in case of stagflation (Hayes, n.d). Stocks have a 10 percent average annual return which is far much better compared to the annual 3.2/percent inflation rate. This difference in margin gives an extended time horizon to buy and hold despite the value dropping temporarily. (CNN on analyzing the benefits of investing in stocks for retirement) (Amadeo, 2017). Equity has the advantage of outpacing prices when the economy experiences inflation. Inflation significantly depreciates the cash value of savings which forces equity investors to counter this threat. Shares have been historically attractive from this perspective; with prices of shares rising, companies scale up their turnover and make profits at a higher rate than increasing price.

Investing in the stock market is very easy and simple since it only entails purchasing of equity through a financial planner, broker or online purchase. Investment in the stock market does not need a lot of capital to start. A person can start an investment with little capital. It only requires an investor to master the art of trading in the stock market which; comes with experience or learning from experienced investors. There are many individuals who trade in shares and are very successful. An outcome that is profitable is basically as a result of adhering to simple principles which can be derived from the many experienced investors who have a better understanding of the cycles (Lewis, 2016).

Investors in the stock market enjoy a limited liability. This is because the extent of any liability by the shareholder or investor is only limited to the investment made. If the company suffers any loss, the share of loss will not be borne by the investor whether the loss goes above and over the capital investment.

Investing in a limited company gives a shareholder right of ownership. Stock allows investors to own part of a company that is successful (Amadeo, 2017). This sense of ownership, therefore, gives the shareholder the right to exercise control, that is, the shareholder has voting rights in the company. With ownership in the company, an investor is able to take part in the companys stakes in the rapidly growing industries as well as new and more exciting sectors. This benefit comes in handy with the development and growth of emerging market economies such as the energy and mobile sectors which are among current thematic investments (Oxlande, 2016). For example; consumer demand for the iPhone X briefly made Apple the first $900 billion company in U.S after the company launch of iPhone X (Nagi, 2017).

Ownership in stock investment can easily be transferred. Shares owned by companies that are listed on the stock exchange have the advantage of anytime liquidity. This means that shares have an easy transfer of ownership. The stock market allows for the sale of shares at any given time at the shareholders convenience. Since the prices of shares are highly volatile, the shareholder can sell his shares in a hurry to get cash so as to avoid the risk of shares owned losing value.

The stock market investment enables the investor to make money in two ways. Most investors have the habit of buying shares when their price is low and sell upon the increase in the value of the share. Investing in a fast-growing company means translates to a faster appreciation of the value of the share. This attracts both; buy and hold investors as well as day traders. The day traders look forward to taking advantage of trends that are a short-term whereas the buy and hold traders have their expectations on seeing their stock and companys earnings grow over time. These two group of investors believe that their expertise enables them to outperform the market. Other stock investors tend to have a preference for a regular stream of cash. They buy shares of companies whose growth rate is moderate and pay dividends.

Investing in the stock market provides a global scope for investment for interested individuals. In the past, buying of shares was mainly limited to a handful of companies. However, with technological advancements and the trading of shares having gone electronic, it means that an investor can easily invest in any part of the world. This global scope gives investors potential to enjoy exposure to fast-growing industries or sectors in the world irrespective of their location. Investors are able to enjoy attractive dividends overseas. Todays ambitious and profit-oriented stock investor is able to enjoy income from a more diverse pool of companies.

Investment in the equity market allows the investor to enjoy real growth. This is because, unlike fixed income investments that have expiry or maturity date, shares have no time limit. This means that an investor can maintain his share of the stake in the company as long as he wills. This opportunity offers the investor with accessibility to real asset growth and participation in the companys growth in the industry.

Despite the benefits enjoyed, stock investment comes with risks. There are risks that the investor may have the ability to control while some risks are beyond the investors control which is inherent to investing. Therefore; it is better to guard against risks that the investor has no control over. The market or economy is usually affected by these risks and therefore it requires investors adjustment so as to adjust or wipe out the risks (LIttle, 2017). The Economic risks is a major and most obvious risk that hits the stock market. The Economy can be impacted negatively due to many reasons such as insecurity due to terrorist attacks or political instability and economic sanctions imposed on a country. For example; the market bust in 2000 and the 2001 terrorist attack led to the market index losing significantly. This took economy years to recover; but again, the economy suffered another setback in 2008 during the Great Recession (LIttle, 2017). Young investors that have little experience are forced to ride out these setbacks since they have no other strategy to handle such situation.

Inflation is another risk that faces the stock market investment since it results to tax on everyone. Inflation reduces the value of shares and creates recessions. Although stock investors tend to believe they have inflation under control, it eventually causes a recession. Investors are usually forced to retreat to hard assets such as gold and real estates it time of inflation. A recession that is global means that stocks will struggle for a duration of time until the economy gets back on feet and be strong to bear higher prices (Lawrence, 2015). A company makes losses if the rate of inflation is higher than the performance and the returns a company is making (B.K, 2015).

Stock investment may suffer market value risk whereby the market ignores or goes against an investment. It is the inability of a market to respond to an investment and instead chase after another investment that is deem to be more attractive and lucrative. Market risk also occurs when there is a collapse of the market resulting in both good and bad stocks to suffer; which scares and causes a stampede of investors out of the market. Investors that put all their money in one sector and the market is faced with this risk, end up huge losses. Investors are therefore much safe if they spread their investment so that they dont face big losses. This means that returns on investment are not fully guaranteed. While stocks are known to perform well in the long run, there is no guarantee that returns will be achieved at any time. There is no guarantee that a company will pay dividends on shares bought or prices may go up. Therefore; an investor should prepare for any outcome.

Emotional risk plays a critical role in stock investment. Any investment should always be guided by past history, data and current of the market. With this information, an investor can, therefore, go ahead and invest in the most viable investment opportunity. However, some investors are blind by greed and fear in making investment decisions. Decisions based on emotions may negatively affect an investment opportunity (B.K, 2015)

Political risk is another risk that affects stock market investment. Political risk also known as the legislative risk is the tentative relationship that exists between the business and government (Beattie, 2016). Market mood is significantly influenced by a change of government in a country depending on the incoming government. The government may be friendly to the industry or not. For example; the S&P 500 Index profits are expected to rise from a total of $129.4 a share in 2017 to $145.70 in 2018 according to data projections from thousand individual companies compiled by Bloomberg. Rough estimates four days before the November presidential vote were the same-$131.30 for 2017 and $146.40 for the year 2018 (Chris Nagi, 2017). That does not imply that companies should be paranoid or be a bias of political happenings (Hill, 2015). Political risk also explains why the economy of many countries performs poorly during the election period. Companies that had rallied in the November U.s elections; where Trump wo...