Share Investing Is Like Crossing The Road

Is share investing a risky activity?

One of the main reasons stopping more people investing in shares is that they think it is.

Well, crossing the road is also risky but most people do it every day!

Some roads are more risky to cross than others because of more traffic, faster traffic, wider road, no pedestrian signals or zebra, etc.

Crossing roads is more risky for some people than others because they can’t see properly, or hear properly or they are too young and haven’t learnt how to cross a road safely yet.

The point I am making is this…

If you know how to cross the road properly and you pick the right road to cross and you cross at the right time, then it is pretty safe.

Likewise with share investing.

Share Investing Is Like Crossing The Road

Crossing the road safely is about reducing the probability of an accident occurring i.e. reducing your risk.

When we were at school, we were taught to first find a safe place to cross where we could see and hear easily.

Then stop, look and listen for traffic.

If everything is clear, start to cross the road, keeping looking and listening all the time.

Walk swiftly (don’t run or dawdle), until you have finished crossing the road.

Why am I explaining this when you are adults and know this already?

I need you to realise that crossing the road is a process.

Not just any process, but a tried and tested and proven process that works most of the time.

Even when it doesn’t work completely, it minimises your risk of an accident.

That’s because the process recognises the risks and has the risk mitigation activities built into the process.

Traffic is the identified risk so you look for it and listen for it, etc.

So the key to share investing is to know the risks so that you can mitigate them.

What Are The Main Share Investing Risks?

Essentially, share investing risks can be grouped into two – Market risks and Company risks.

Share prices go up and down all the time when they are being traded in the market.

Some company shares are more volatile with greater percentage price changes than others.

There’s nothing you can do about this I’m afraid.  If you want to invest in shares, you’ll have to get used to it.

What’s important though is recognising that, whether prices rise or fall, they rarely do it in a straight line – they jiggle up and down.

These small perturbations in price are a result of the individual deals being done by the market traders who are trading the shares on behalf of their clients (that’s people like us by the way).

If you are a day trader, these movements matter.  If you are trading over the longer term, these don’t matter.

The kind of market movements that do matter to us are the ones that affect the market as a whole.

Market Risks

These are the kind of things that have caused market crashes in the last few weeks.

For example, Government debt problems like in the USA or Greece, France, Spain, etc.

Or the thought that we will have a double dip recession.

These sorts of things are thought to affect all companies in the market equally – they don’t actually – but the initial reaction to the news (which might be good, by the way; I know I’ve mentioned crashes here but it could be something else, more positive) is to treat everything the same because there’s no time to do the company level analysis.

As time passes, investors and market traders do have the time to work out which companies are the most sensitive to the recent market news.

At this point, shares will move again to better reflect their current prospects.

However, these are still market risks because they affect all companies in the market to a greater or lesser extent.

Company / Business Risks

Company risks are those that are particular to a given company or business that a company is in.

These include poor management, carrying more debt than the company can afford to finance, unstable customer demand, dodgy accounting practices, lots of competition, rising costs, etc.

These are things that you can look for and analyse before you buy your shares.

In other words, this is like stopping, looking and listening, before you cross the road.

You can also reduce your company risk by buying shares in several companies that are different kinds of business or in different sectors.

This is called spreading your risk or diversification – “not putting all your eggs in one basket”.

Choosing a sector where you don’t already have shares is like first finding a safe place to cross.

When you already own the shares, there are things you can do to minimise your losses if a problem hits one of your company’s shares.

For example, some brokers let you set a stop-loss.  Other’s provide email alerts instead (the next best thing).

This is like continuing to look and listen whilst you are crossing the road.

Like anything else, the more you practice share investing, the more you will learn and the safer and less risky it will become for you.

Happy share investing!

If you’d like to know as soon as I publish another blog article, then sign up below for my newsletter below.

Otherwise, feel free to leave me a comment and to share this article with your friends.

KInd regards,

Adrian.

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