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Market Risk
People talk about the market and how it goes up or down, making it sound like a monolithic entity instead of what it really is a group of millions of individuals making daily decisions to buy or sell stock. No matter how modern our society and economic system, you can’t escape the laws of supply and demand. When masses of people want to buy particulars stock, it becomes in demand, and its price rises. That price rises higher if the supply is limited. Conversely, if no one’s interested in buying a stock, its price falls. Supply and demand is the nature of market risk. The price of the stock you purchase can rise and fall on the fickle whim of market demand.
Millions of investors buying and selling each minute of every trading day affect the share price of your stock. This fact makes it impossible to judge which way your stock will move tomorrow or next week. This unpredictably and seeming irrationality is why penny stock are not appropriate for short-term financial growth.
In April 2001, a news program reported that in 2000, a fellow with $80000 in the bank decided to take his money and invest it in the stock market. Because he was getting married in 2001, he wanted his money to grow faster and higher so that he could afford a nice wedding and a down payment on the couple’s future home. What happened? His money shrank to $11000 and he had to change his plans. Sometimes, “market risk” begets “romantic” risk.
Losing money is only one headache you face when you lose money this way; the idea of postponing a joyful event, such as a wedding or home purchase, just adds to the pain. The gent in the preceding story could have easily minimized his losses with some knowledge and discipline.
Markets are volatile by nature; they go up and down, and investments need time to grow. This poor guy should have been aware of the fact that shocks in general aren’t suitable for short term goals. Despite the fact that the companies he invested in may have been fundamentally sound, all stock prices are subject to the gyrations of the marketplace and need time to trend upward.
Understanding market risk is especially important for people who are tempted to put their nest egg or emergency funds into volatile investments such as growth penny stocks. Remember you can lose everything.
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