Education / Share market / Risks of investing in shares

One global point of making decisions about investing in shares is risk. It is most obvious that risks should be minimized. But in reality it is the risk-reward ratio that should be optimized. So if the potential risk may be close to or even higher than the potential reward then it's reasonable to stay away from that investment.

In case when a company you invest in goes bankrupt, your shares become worthless. Inflation may half your savings over the long term but if share prices fall, you run the risk of losing money at once.

But this is not the only risky situation of loosing investments. Other market performers may simply decide that the company is not worth its present market price and if quite a number of them think that, share price will fall. Besides this shares tend to fall when the whole economy is deteriorating, as far as investors predict profits will decrease.

There situations when a share has fallen in value, but it's still worthy of holding until it recovers. The market can experience volatility in the short term. Individual stock prices can go down as well as up. At other times it may be better to cut your losses and invest in a company that has better prospects. So it's your own decision that should be made subject to many external factors and your individual circumstances.

And one more source of investment risk is emotional risk. Emotions are important risk considerations because the main decision makers are human beings. Logic and discipline are critical factors in investment success, but even the best investor can let emotions take over the reins of money management and cause loss.