How Risky Are Stocks?
Stocks can be very risky. You can lose your entire investment in a stock if the company goes bankrupt. However, the risk varies considerably and can be managed or minimized. Pink sheet, bulletin board and penny stocks are the riskiest. These groups represent unproven, speculative ventures (and sometimes outright fraud) that are often subject to manipulation by unscrupulous stock market operators or company management. The risk of loss in them is extremely high.
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Pink Sheets
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Pink sheets is a daily publication that lists stocks of companies that do not need to meet minimum listing requirements or file reports with the Securities and Exchange Commission (SEC). They are identified by appending a .PK extension to their symbols.
Bulletin Board
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Bulletin board stocks must file reports with the SEC but do not have to meet minimum listing requirements. They are identified by an .OB extension.
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Penny Stocks
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Penny stocks are stocks priced below $1 per share. Any stock can end up in this category, including some former blue chips or Internet high-fliers.
Any Stock Can Go Down to Zero
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Theoretically, any stock can go down to zero at any time for any reason, although it does not happen often or overnight, but as Bear Stearns, Lehman Brothers and General Motors show (and Enron and WorldCom before them), even blue chip companies can go bankrupt and take all the investor money down with them. Investors cannot afford to be complacent or lulled by any stock's perceived "safety."
How to Protect Yourself
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Stock investors cannot avoid or eliminate risk but they can minimize it. One way is to buy and hold stocks that are going up and sell them as soon as they turn down. As tragic as it was for people to lose their life savings in General Motors or Enron, it did not have to end this way. They could have gotten out long before it was too late. Another strategy is to diversify through mutual funds. Mutual funds hold multiple stocks across several industries, and although mutual fund losses in a bear market can at times be substantial (up to 50 percent in some instances), there is virtually no possibility of all stocks in a mutual fund portfolio going down to zero at the same time---unless the stock market is shut down altogether.
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