New to stocks, how where and why should i start? What are the risks?
March 8th, 2008 | by admin |Kouseki asked:
Hello everyone! Im interested in learning more about stocks and investing. What are the risks ? Can i ever owe money? If I buy stocks for a certain amount and they reduce in value, they don’t go into the negative amounts correct? Thanks for any help!
Hello everyone! Im interested in learning more about stocks and investing. What are the risks ? Can i ever owe money? If I buy stocks for a certain amount and they reduce in value, they don’t go into the negative amounts correct? Thanks for any help!
2 Responses to “New to stocks, how where and why should i start? What are the risks?”
By Kevin R on Mar 10, 2008 | Reply
You ask alot. 1) the risks are up to you. Know that prices will fluctuate, up and down and up. The basic ‘buy low/sell high’ is the only real truth. There are ways to leverage your profits and losses through debt, but you don’t have to owe for any stock you purchase. No common stock can ‘go into the negative’, the lowest is 0.
So, you buy 100 shares of XYZ at $10. You spend $1,000. The price goes down to $8. Do you buy, sell, or hold? this is the fundamental risk assessment you must answer for yourself, before you buy any stock. I’ll say that I will increase my holdings, by buying15 more shares of XYZ.
This is why I’m never 100% in or out of any market. When the price of XYZ recovers to $9. You are still down $100 on paper, me $85. At the initial $10 price and all that sweating you did, you’re even, I’m ahead $30 or 3%. There are stocks, high risk, yes, that fluctuate like this every week.
At $11 dollars you are finally ahead $100. Depending on commissions and taxes you might not want to sell either, but I am. I’m selling 14 shares at $11. Mister, this stock went down 20% after i bought it, recovered the loss, then appreciated some more. even got you some paper profit. I got mine in cash and I own more stock than I started with. Every stock does this in time.
This is how I’ve done it, crunch some numbers too.
By Paul Helps on Mar 12, 2008 | Reply
Buying regular stocks, you can’t lose more than the money you’ve invested. So if you invest $1000 the most you will lose is that $1000.
The ways you could owe more money than you invest are basically around borrowing:
- “short-selling”: where you bet that stock is going down by selling borrowed stock before you ever buy it. (I know that sounds weird – just avoid it until you are an expert!). If the stock keeps going up and up in price you are basically screwed because you have to return the borrowed shares, which means buying them at the higher price to get out.
- buying on “margin”: where you borrow a percent of the money to leverage your investment. If the stock goes down even temporarily, the bank will not let you wait it out – and will force you to sell some shares at the lower price (or transfer new money of your in) to act as collateral for the borrowed money. If the stock goes to 0 you owe twice as much as you invested (or whatever the percent was that was borrowed).
I should add the the other places where you lose money is on the actual transactions. Each buy and sell costs around $10, so if you are only investing $1000, your losing 2% just on the buy and sell of the stock! It doesn’t make sense to me to ever buy less than $5000 at a time – if you’re buying less I’d say stick with a no load mutual fund with a low MER (Management Expense Ratio) of under 1%. The market is low now, so buying a good index fund or ETF and leaving it there is probably a good bet for if you have a time horizon of a few years at least.