Think about all the ways that an investment can lose money. You can list all sorts of possibilities. So many that you may think, “Holy cow! Why invest at all?”
Don’t let risk frighten you. After all, life itself is risky. Just make sure that you understand the different kinds of risk before you start navigating the investment world. Be mindful of risk and find out about the effects of risk on your investments and personal financial goals.
Financial Risk
The Financial Risk of penny stock investing is that you can lose your money if the company whose stock you purchase loses money or goes belly up. This type of risk is the most obvious because companies do go bankrupt.
You can greatly enhance the chance of your financial risk paying off by doing an adequate amount of research and choosing your stock carefully. Financial risk is a real concern even when the economy is doing well. Some diligent research, a little planning, and a dose of common sense help you reduce your financial risk.
In the penny stock investing mania of the late 1990s, millions of investor ignored some obvious financial risk of many then-popular stocks. Investors blindly plunked their money into stocks that were bad choices. Consider investors who put their money in Drkoop.com, a health information web site in 1999 and held on during 2000 per by mid-2000. By the time the stock was DOA, investors lost millions. RIP (risky investment play!)
Internet and tech stocks littered the graveyard of stock market catastrophes during 2000-2001 because investors didn’t see the risk involved with companies that didn’t offer a solid record of results. Remember that when you invest in companies that don’t have a proven track record, you are not investing, you are speculating.
Investors who did their homework regarding the financial conditions of companies such as the Internet Stock discovered that these companies has the hallmarks of financial risk - high debt, low earnings, and plenty of competition. They steered clear, avoiding tremendous financial loss.
Investors who didn’t do their homework were lured by the status of these companies - the poster children of booming internet fortunes - and lost their shirts.
Of course, the individual investors who lost money by investing in these trendy, high-profile companies don’t deserve all the responsibility for their tremendous financial losses; some high-profile analysts and media sources also should have known better. The late 1990s may someday be a case study of how euphoria and the herd mentality ruled the day. The excitement of making potential fortunes gets the best of people sometimes, and they throw caution to the wind. Historians may look back at those days and say, “What were they thinking?” Achieving true wealth takes diligent work and careful analysis.
In terms of financial risk, the bottom line is ….well.. the bottom line! A healthy bottom line means that a company is making money. And if a company is making money, then you can make money by investing in its stock. However, if a company isn’t making money, you won’t make money if you invest in it. Profit is the lifeblood of any company.
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