To the uninitiated, the stock exchange can seem like a casino, with news and social media feeds sharing stories of investors striking it rich by playing the stock market. But while there are winners, there are also losers, those who lose money playing the market, sometimes pulling their money out of the market because they’re afraid of the potential of losing money.

Playing the stock market does come with investment risks. For new investors learning how to play, the stock market can be a frustrating, humbling and in some cases, incredibly rewarding experience.

While investing is serious business, playing the stock market does have an element of fun to it. Investors who do their research and tune into the news and business cycles can take advantage of trends that might better enable them to earn good returns on investment.

This is what you need to know about how to play the stock market, the risks involved and what makes the market so alluring.

Playing the Stock Market: What Does it Mean?

Despite the phrase “playing” the stock market, it’s important to make the distinction between investing and gambling up front.

While there are some clear similarities — both investors and gamblers are trying to make money, after all — there are a couple of key differences. While both gambling and investing involve risk, investing actively manages that risk, rather than relying on blind luck to guide a person to positive returns. Second, and similarly, investing involves a strategy, something that a gambler pulling the lever on a slot machine or betting on red or black can’t employ.

But because all investing involves an element of risk — there is no 100% safe investment — in a way each investment can feel like a gamble. However, it’s important to keep in mind that the market is not a casino, and just because there’s risk involved doesn’t mean that “playing the market” is the same as playing roulette.

So what does “playing the stock market” actually mean? In short, it means that someone has gained access to and is actively participating in the markets. That may mean purchasing shares of a hot new IPO, or buying a stock simply because Warren Buffett did. “Playing,” in this sense, means that someone is investing money in stocks.

Playing the Market: Risks and Rewards

Learning how to play the stock market — in other words, become a good investor — takes time and patience. It’s good to know what, exactly, the market could throw at you, and that means knowing the basics of the risks and rewards of playing the market.

Potential Risks

In a broad sense, the most obvious risk of playing the market is that an investor will lose their investment. But on a more granular level, investors face a number of different types of risks, especially when it comes to stocks. These include market risk, liquidity risk, and business risks, which can manifest in a variety of ways in the real world.

A disappointing earnings report can crater a stock’s value, for instance. Or a national emergency, like a viral pandemic, can affect the market at large, causing an investor’s portfolio to deflate. Investors are also at the mercy of inflation — and stagflation, too.

For some investors, there’s also the risk of playing a bit too safe — that is, they’re not taking enough risk with their investing decisions, and as such, miss out on potential gains.

Potential Rewards

Risks reap rewards, as the old trope goes. And generally speaking, the more risk one assumes, the bigger the potential for rewards, though there is no guarantee. But playing the market with a sound strategy and proper risk mitigation tends to earn investors money over time.

Investors can earn returns in a couple of different ways:

• By seeing the value of their investment increase: The value of individual stocks rise and fall depending on a multitude of factors, but the market overall tends to rise over time and has fully recovered from every single downturn it’s ever experienced.

• By earning dividend income: Dividends can also be reinvested in order to further grow your investments.

• By leaving their money in the market: It’s worth mentioning that the longer an investor keeps their money in the market, the bigger the potential rewards of investing are.

How to Play the Stock Market Wisely

Nobody wants to start investing only to lose money or otherwise see their portfolio’s value fall right off the bat. Here are a few tips regarding how to play the stock market, that can help reduce risk.

Invest for the Long-term

The market tends to go up with time and has recovered from every previous dip and drop. For investors, that means that simply keeping their money in the market is a solid strategy to mitigate the risks of short-term market drops.

That’s not to say that the market couldn’t experience a catastrophic fall at some point in the future and never recover. But it is to say that history is on the investors’ side.

Consider: If an investor buys stocks today, and the market falls tomorrow, they risk losing a portion of their investment by selling it at the decreased price. But if the investor commits to a buy-and-hold strategy — they don’t sell the investment in the short-term, and instead wait for its value to recover — they effectively mitigate the risks of short-term market dips.

Do Your Research

It’s always smart for an investor to do their homework and evaluate a stock before they buy. While a gambler can’t use any data or analysis to predict what a slot machine is going to do on the next pull of the lever, investors can look at a company’s performance and reports to try and get a sense of how strong (or weak) a potential investment could be.

Understanding stock performance can be an intensive process. Some investors can find themselves elbow-deep in technical analysis, poring over charts and graphs to predict a stock’s next moves.

But many investors are looking to merely do their due diligence by trying to make sure that a company is profitable, has a plan to remain profitable, and that its shares could increase in value over time.

Diversify

Another effective risk-mitigation strategy that investors can employ is diversification. Diversification basically means that an investor isn’t putting all of their eggs into one basket.

For example, they might not want their portfolio to comprise only two airline stocks, because if something were to happen that stalls air travel around the world, their portfolio would likely be heavily affected.

But if they instead invested in five different stocks across a number of different industries, their portfolio might still take a hit if air travel plummets, but not nearly as severely as if its holdings were concentrated in the travel sector.

Use Dollar-cost Averaging

Dollar-cost averaging can also be a wise strategy. Essentially, it means making a series of small investments over time, rather than one lump-sum investment.

Since an investor is now buying at a number of different price points (some may be high, some low), the average purchase price smooths out potential risks from price swings.

Conversely, an investor that buys at a single price-point will have their performance tied to that single price.

The Takeaway

While playing the market may be thrilling and potentially lucrative, it is risky. But investors who have done their homework and who are entering the market with a sound strategy can blunt those risks to a degree.

By researching stocks ahead of time and employing risk-reducing strategies like dollar-cost averaging and diversification when building a portfolio, an investor is more likely to be effective at mitigating risk.

The post The risks of playing the stock market appeared first on Mediafeed.org and is written by Samuel Becker

Original source: Mediafeed.org