Stock Investing for Beginners
INCOME OPPORTUNITIES,  Stock Market

Stock Investing for Beginners: What are the Risks Involved?

Stock investing for beginners can be very exciting and challenging at the same time. Knowing how some people made fortunes in the stock market makes all of us — especially the rookies, become more motivated to reach the same state.

What you may have heard, however, are just the success stories. You probably haven’t heard the flip sides of investing in the stock market.

When I started investing, I wasn’t really particular on the risks involved as well. My eyes were fixed on the rewards without viewing the downsides. I tell you, not knowing the risks incurred me more losses than what I had imagined. And my stock market portfolio is not an exemption.

Here are just some of the risks involved in stock market investing I wish I took seriously before. The following may also be of help in your stock market investing journey:


Table of Contents

  1. Volatility Risk
  2. Liquidity Risk 
  3. Emotional and Psychological Risks 

1. Volatility

When I was still a neophyte to stock market investing (and even in cryptocurrency and forex trading), what’s on my mind was the stock market is like a magical ATM machine. And that I can just take out money from there anytime I want — which is obviously a wrong perception.

I remember refreshing my portfolio every second, every minute, and every hour of the day just to see how my stocks are doing. I constantly check them to know if I could already take some cash and buy myself a lambo. One second, my port is gaining. The next thing I knew, all my stocks have turned red already.

I know Mia Khalifa can relate to that sudden rise and fall. It is evident in one of her tweets:

Yep, we can just blame it to volatility, Mia.

What is volatility then?

Volatility or commonly called as “market risk” simply refers to the upward and downward range movement of a price in a specific period. Some people prefer calling it as market fluctuations.

One of the major factors affecting volatility is the investors’ interest on a particular stock. Such interest may be driven by economic or company news and events.

High volatility vs low volatility

High volatility stocks mostly have extreme highs and lows while low volatility stocks have lesser fluctuations in a specific period.

Let’s just take this representation for example:

Stock Investing for Beginners: Volatility is one of the risks involved
Okay. The high volatility trend seems a little bit exaggerated, but I just want you to see the difference between the price transitions of high volatile vs low volatile stocks.

Why does knowing volatility matters?

You will eventually experience volatility in the stock market whether you like it or you like it very much. Just like a lifeline, those fluctuations make the stock alive. It is, therefore, a natural occurrence that cannot be avoided.

Volatility will also greatly play on your emotions. But once you get yourself acquainted with it, you can already anticipate for the movements against your bias — making you an emotionally resilient investor.

Furthermore, knowing volatility will give you an idea of what stocks to trade according to your risk appetite. The lower the volatility, the lower the risk (and also the rewards).

Volatility: How can you make it as an advantage

Buy low sell high. Since you are already expecting fluctuations, you can time your entry by buying stocks at lower prices and selling them at a significantly higher cost.

Reduce exposure to high volatility stocks and aim for stocks with high dividends. If you are a conservative type of investor, you can help yourself by avoiding stocks with high volatility. Choose the stocks with lower fluctuations but at the same time gives high dividends. Through this, you can earn more in dividends without worrying much on possible price dives.


Read More: Are you prepared to invest?


2. Liquidity risks

There was a time when I was forced to sell my stocks at loss due to an emergency. My stocks haven’t reached my target price yet, but I have to do such tough decision. It felt terrible but I badly needed the money.

I think this is what other people fail to realize as well. Truth is, you can’t just expect to withdraw your money from your stock portfolio whenever you needed it or just because you wanted to have some cash.

Remember, the stock market is really designed for long-term investing. It usually takes years or even decades in order for you to have some significant returns.

And you can’t just bet all your available cash to these kinds of investments. You have to consider the liquidity of your assets as well.

To better understand it, let’s talk about Liquidity.

What is Liquidity?

Liquidity, from its root word, “liquid”, has a running or flowing characteristic. If you relate it to your finances, it is how quickly you can acquire your cash. In simpler terms:

Liquidity is the accessibility of your money whenever you need it. And yep, I am talking about cold cash.

PS: Unfortunately, Mia hasn’t tweeted about liquidity yet but I made a graphic for you to grasp its concept:

Liquidity vs. Time

Stock Investing for Beginners: What is liquidity?

I highlighted four types of financial assets. It simply tells you that the higher the time to encash the money, the lesser the liquidity is. If you take a look at the graph, the assets are descending from the most liquid to the least liquid ones: cash, bank savings, stocks, and real estate.

Liquidity management tips

Never ever underestimate the power of having an emergency fund. Some people suggest that an emergency fund should amount to 3-6 months of your living expenses. For me, the numbers don’t really matter as long as you prepare enough cash for contingencies and emergencies. But the bigger the better, of course.

Diversify. Never bet all your life savings in investments as risky as stock market investing. Try balancing your asset allocation from conservative to aggressive investments in order to lessen the potential financial risks. 


Read More:Four Ways to Invest in the Stock Market


3. Emotional and psychological risks

One of my mentors once told me that in order to be successful in stock market or even in any other market which involves trading, what you need to master isn’t just the skill but the emotional and psychological resilience as well. A lot of stock market investors often overlook this aspect. I know it too well since I was one of those investors (peace out).

What primarily drives these risks, you ask?

Any market which involves trading always has these two culprits: Fear and Greed. Come to think of it. Someone buys either because of the fear of missing out or the greed to earn more. Conversely, someone sells because of the fear to lose more or the greed to take profits.

You see how these two greatly plays on your emotional and psychological being?

Now, here’s a fact: Majority of the investors let their emotions dictate whether they are to buy or to sell. Only a few went extra miles to look at the market objectively.

Now, when will these two become risks?

If you don’t have the emotional and psychological buffers necessary to stay on track, one bad decision could spring to worse ones. The result? More financial losses than what you can imagine.

One serious effect of having fragile emotional and psychological fitness as well is when it can already affect the other areas of your life.

Stock Investing for Beginners can be mentally and emotionally stressful

I remember not having the appetite to eat because of the losses I incurred on a particular day. And mind you, it could happen to you as well. It could affect your performance at work, your energy to socialize, and even your reasons to keep going. The most disturbing part is when you already start questioning your whole being. Thug life.

How to strengthen your emotional and psychological buffers?

Stay on the market. You don’t necessarily have to do anything. You just have to observe how the market works. Just observe. Notice how the price moves and how they form familiar structures.

Stay on the market in order for you not to lose your momentum — even in your worst days. Trust me, you will learn something from the market just by observing it every damn day.

Assess both your winning and losing trades. Whether you’re a beginner or a pro, having a journal of both the good and bad trading decisions you made definitely matters. It does not only refine your strategy, but it can also be your gateway to know what type of investor you are.

Know that it’s all part of the process. In investing, nothing’s really guaranteed. Whether it’s a business, or bonds, or mutual funds, you will still lose money. But knowing that it’s all part of the game will make you a good market player.


Read More: Top 10 Best Investments for Beginners


Stock investing for beginners shouldn’t be that hard

One of the common misconceptions for the newbies is stock investing could yield 10% annual interest. Well, let me tell you. That is definitely achievable but there is no guarantee you would achieve that. I will tell it straight to you — you will actually lose money in the stock market. It can be due to normal price fluctuations or bad trading decisions.

I know a few people who invested five years ago but are still in loss at the moment. I also know some people who just started a few months ago yet unbelievably aced it like a pro.

Again, investing in stock market should not be treated as a get-rich-quick scheme. It should be treated like a business. And in order to be profitable in such business, you have to get acquainted with the roundabouts, including the risks involved.

However, stock market investing shouldn’t be that hard. Don’t get too intimidated with the risks I just mentioned above. In fact, you should thank yourself for knowing such risks for it can help you lower your expectations while increasing your feel on the market.

Before I end this, I want to leave you with one of my favorite quotes:

The greatest risk comes from not knowing what you are doing.


Warren Buffet

If you find this article helpful, don’t forget to share it with your friends who want to learn more about stock market investing!

Previous Lessons: 

Why Do People Invest In Stocks? Here Are Five Big Reasons

Understanding How Stocks Work: Stock Market Basics

Icon credit: The icon used in this article’s featured photo was taken from Freepik.com, which can be found in the following link:

Background vector created by iconicbestiary – www.freepik.com

Sheila is a civil engineer by profession but has switched careers to become a copywriter. She loves making sales through stories that are relatable to the average person. She's also a sucker for memes and thinks she’s the funniest person in the world (even though she knows that’s not true). Her favorite drink is Kopiko Brown coffee, but she'll also take tea or beer if it's offered.

2 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *