STOCK MARKET RISK TOLERANCE FOR DUMMIES
If you want to get involved with the stock market and learn how to buy stocks online, sooner or later you are going to have to assess your risk tolerance. When the market is in the midst of a bull market and going up most of the time, you might not think about it as your stocks are gaining most days. But when the market is choppy or going down, that is when you will be tested.
Risk tolerance for dummies is the amount of risk a person can deal with before it starts to make them feel uncomfortable. Everyone is different and everyone has different comfort levels. For instance, professional poker players must have a very high risk tolerance because they are gambling and putting their money on the line every day. Other people cannot comprehend a lifestyle like that and want to go to work everyday knowing exactly how much they will make.
People who work 100% on commission must also have high risk tolerances. When they go to work, they know that they will make nothing if they don’t make sales. Of course the risk/reward can be high with commission jobs because they can make a lot when they are making sales.
Buying stocks for the first time will put your money at risk and you will be open to gains and losses everyday. You will have to get accustomed to both making money and losing money each and every day the market is open. The more dollars you invest, the bigger the swings will be.
As an example, someone who has $100,000 invested in stocks may routinely gain or lose thousands every day. When the market goes 2%, there gains will probably be somewhere in that neighborhood depending one how it is invested. Likewise, when the market drops, that person may very well lose several thousand dollars or more. Now, if that person works and makes an average of $150 a day, the thought of losing several thousand while they are working for $150 may be too much for them to handle.
Risk tolerance is each persons ability to deal with adversity and to accept losses. Some people are able to easily separate the daily ups and downs in the stock market from what goes on in their personal lives. These people have high risk tolerances and don’t let losses bother them. Other people though, have much difficulty knowing that their money is at risk and have a hard time dealing with losses.
As you start investing in stocks and become familiar with the market, you will also become familiar with your risk tolerance. You can’t really know what it is until you are tested for real and everyone reacts differently. Some people who start out with a low risk tolerance are able to change and they get used to the ups and downs. Others seem to have a set tolerance and can’t change it which means they need to invest accordingly.
Whether you are able to adapt and “go with the flow” will determine your investing style. Investors with high risk tolerances might invest in riskier stocks or be alright with having a larger portion of their money in the market. People with low risk tolerances should probably invest very conservatively and buy stocks online of only those companies that are well established and quite safe. Whatever investing style you have, you should always be aware of your risk tolerance so if the market goes down. that won’t encroach on your real life and you will be able to comfortably deal with it.
