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Are stocks too risky for you?

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
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In all financial markets, stocks are popular among investors. Investors can make and also lose a lot of money in the stockmarket. Stocks can be volatile investments as prices can move up or down over short periods. Are stocks good investments then?

Historically, there have been booms and busts, but the very long-term trend has been growth. To many fund managers, stocks are part and parcel of their portfolios for long-term capital growth.

Although it seems to be electrifying to trade in the local stockmarket, you must not forget the level of risk involved. The on-going market turbulence should be taken as a good example. You should learn how to overcome your own weaknesses at least to prevent greater losses from the short-term market volatility.

The current stockmarket crisis has adverse effects on many stock players. For some personal investors, the current low prices of stocks may provide interesting opportunities for long-term stock buying. For others, they may prefer to stay out until the market stabilizes.

The winning strategy is to buy low and sell high. But how many times in the past did investors actually hit it right?

Trying to identify the bottom of a market that is beset by negative sentiment is always a difficult task but if you are long-term, you may try to selectively pick some good blue chips supported by sound fundamentals for your portfolio when the market recovers ultimately.

This however, should not suggest that investing in blue chips do not involve risk at all as compared to other type of stocks such as the small capitalized stocks. Generally, stocks with sound fundamentals receive greater attention and will likely recover relatively faster than others.

Whether investors buy or sell, depends on their conclusions on various economic considerations. Economic factors such as interest rates, inflation, unemployment rate, affect stock prices. Do not forget the political risk as well.

For example, high inflation normally brings down stock prices as higher cost of labor and materials reduce the profit margins of the companies, thus lower stock prices. High unemployment rates which normally point to a slowing economic growth usually affect stock prices negatively. Other considerations which normally affect stock price movements are industry and company factors.

Studying the various factors affecting companies, industries and economy as a whole can help you to manage your stock investments better. Fundamental analysis is widely used by stock investors for stock screening. It involves studying factors such as the earnings per share, price/earnings ratios, and dividend yields of the companies.

On the other hand, technical analysis is also popular for some investors. It basically deals with charts and does not consider factors such as company earnings and quality of the management.

In short, chartists look out for particular patterns for buy or sell signals such as head and shoulders or double bottoms.

If you borrow to invest in stocks (also called gearing), your risks are likely to be amplified although it is equally true that the gains are multiplied especially during good times.