What are the risks of investing in shares?

The rundown

  • The risks of investing in shares are often beyond an investor’s control. These include capital loss risk, liquidity risk, and market volatility.
  • Investors can manage risks by understanding their risk tolerance, diversifying their portfolio, staying informed about current affairs, and seeking professional advice.

What are the risks?

When you invest in shares, the value and price of shares can fluctuate. Sometimes, external factors like conflict or political events can affect the market. Here are some risks to be aware of:

  1. Capital loss risk: This is the risk of selling shares for less than you paid, resulting in a capital loss.
  2. Liquidity risk: This is the risk that getting into or out of the sharemarket may be harder than anticipated, as you may not always find a buyer or seller at your desired price or time, which could result in missed opportunities. 
  3. Market and economic risk: External factors can affect companies and the share market, causing market volatility.

 

How can I manage risk?

Assess your risk tolerance
Consider how much you can afford to lose and how long you plan to invest. Think about your lifestyle and how much risk you can tolerate without it affecting your daily life. If you're young and plan to invest for many years, you might handle market ups and downs better.

Diversify your portfolio
Diversification is a key strategy to manage risk. This means spreading your investments across different sectors like energy, financials, and healthcare. You can also consider other asset classes like property or bonds. Exchange-traded funds (ETFs) are a great way to diversify, as they give you exposure to a variety of different companies or industries.

Stay informed and updated
Keep yourself informed about the market and economic conditions. This will help you make better investment decisions and manage risks effectively. Regularly review your investment portfolio and make adjustments as needed. 

Seek professional advice
If you're unsure about your investment decisions, consider seeking advice from a financial advisor. They can provide personalised guidance based on your financial situation and investment goals.

 

Remember, all investments carry risks, and it's important to be comfortable with these risks before investing. By understanding and managing these risks, you can make more informed investment decisions and potentially achieve your financial goals.
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CommSec Learn is intended to provide general information of an educational nature only. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Investing carries risk.

Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Investing carries risk.  

© Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

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