Investing in the stock market can be a good way to build wealth, but it can also be dangerous. Before you invest any money in the stock market, it is important to evaluate both the potential advantages and the risks of buying stock. Understanding the pros and cons of the stock market is the best way to make an intelligent and informed investment decision.
Anyone who has spent any time watching the stock market knows how volatile stocks can be. The stock market can be up hundreds of points in a single day, and down even more the very next day. It is impossible for even professional investors to accurately predict the short-term movements of the stock market, and investors who are unprepared for that volatility could be frightened out of the market at its lowest point.
Risk of Loss
Unlike certificates of deposit, Treasury bonds and savings accounts, the stock market carries no government guarantee. If a stock loses value, you can lose some or even all of your money. When you invest in a single company, there is always the risk that the stock will go to zero and you will lose everything you invest. You can mitigate this risk somewhat by purchasing mutual funds instead of individual stocks, but when the stock market falls, stock funds will suffer as well.
Investing too much money in the stock market when you are close to retirement can be dangerous. If the stock market turns against you just as you need to start withdrawing the money, your nest egg could be depleted early. A poor stock market at the start of your retirement could also reduce the amount you can draw out of your stock portfolio, reducing your standard of living or forcing you to work a bit longer.
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