Risks of Stock Market Investing: A Comprehensive Guide

Disadvantages of Stock Market Investing

The stock market is a popular investment choice and the value of stocks owned by investors is more than $15 trillion for the two main stock exchanges located in the U.S., according to the World Federation of Exchanges. For many individual investors there are some good reasons to not be invested in the stock market. Understanding the disadvantages of stock market investing will help an investor decide if the market is the right choice.

HIgh Volatility

The stock market subjects investors to high levels of volatility. This means sometimes the market goes up and sometimes the market goes down. Investors do not mind volatility to the upside, but downward volatility can damage wealth. For example, when the stock market dropped in July 2008, the market lost over half its value in less than a year, as indicated by the S&P 500 stock index.

Not Suitable to Provide Retirement Income

An individual at retirement age may not want a large proportion of retirement assets in the stock market. A retiree needs regular income and many stocks pay little or no dividends. To provide money for living expenses, shares of stock would have to be sold, reducing the portfolio and incurring commissions. Also a major drop in the market will reduce the total capital the retired person has to generate income. Since a bear market--defined as a time when security prices are falling--comes along on average every six to eight years, having most of a person's retirement assets in the stock market will eventually lead to some tight finances.

Large Number of Choices

Investors that want to invest in the market may be discouraged by the large number of choices. The Wilshire 5000 stock market index covers the entire U.S. stock market and includes over 6,000 stocks. There are over 4,000 stock mutual funds. It can take a lot of time, education and effort to research the market and select an appropriate stock portfolio. The size and complexity of the stock market makes it difficult for an individual investor to successfully meet investment goals.

Risks of Ownership

Owning stock is owning part of a corporation. If the corporation declares bankruptcy, the owners or shareholders are last in line to receive any proceeds from the corporate breakup or reorganization. In most cases if a company goes bankrupt the shareholders receive nothing for their shares. Very large and well know companies have gone bankrupt. The list includes General Motors in 2009, Lehman Brothers in 2008 and Enron in 2001.