By Moez Sghaier
Updated August 18, 2024 4:59 p.m.
Every investor dreams of getting substantial profits from investing in stocks. But is investing in stocks suitable for every investor’s profile? Let’s find out:
· The risks involved
· Is there a threshold from which an investor can start investing in stocks?
· What happens when an investor is not ready psychologically and/or financially to lose money in investing in stocks?
· The transaction fees involved
· Are there any alternatives then?
The risks involved
Every investment involves some risk taking. The risks vary with the kind of investment considered. They can vary from no risk at all if you decide to keep your cash under your mattress but must deal with inflation (and maybe with the thieves breaking into your house). On the opposite side of the spectrum, risks can be 100% so you can lose all of your investment if you invest in derivatives for instance and your anticipation/prevision of the underlying asset is completely in the opposite direction. When it comes to stocks, if you invest for a long period of time i.e. 10 or 20 years or more, their value increases over time. But if you try to track their evolution over a shorter period i.e., within a year or even 5 years, you lose your money if you start selling and buying as stocks are very variable in the short run. It’ll be up to you, the investor, to decide if stocks are suitable for you or not.
Is there a threshold from which an investor can start investing in stocks?
It all depends on the individual investor’s tolerance towards losing a certain amount of money. If the market evolution is not favorable, whatever amount an investor is willing to lose constitutes his/her own threshold. Let’s say an investor has 100 shares of a particular company, and each share was bought at $10 on the stock market. So initially, his/her investment is worth $1,000. In case the company’s share drops by 10% and he/she decides to ‘get rid of it’ because it’s losing money according to his/her thinking, his/her investment is now worth only $900. The difference, in this case, is most likely bearable to most investors. But when the loss starts to be hundreds, thousands, and more, investors’ thresholds start to differentiate from one another.
What happens when an investor is not ready psychologically and/or financially to lose money in investing in stocks?
When an investor, especially a novice one, starts losing money on stock, he/she starts panicking and even stops sleeping during the night. The first thought that comes to his/her mind is to stop losing money by selling his/her holdings. In fact, what he/she does is to make that loss a reality while it was only virtual. If he/she could wait until the value of the stock rises again, he/she wouldn’t be losing that money that he/she decides to lose by selling the stock. Some investors who are not knowledgeable enough would buy another stock thinking it could be better than the first one. This way, they repeat the same mistake over and over again, that is selling the stock when its value decreases to ‘get rid of a loser.’ They then put aside the obvious rule in investing in stocks: buy when it is low and sell when it is high!
The transaction fees involved
Beside the decreasing value of the stock on the market, selling your holdings involves transaction fees as that is the case for buying as well. So beside losing money in stock price difference, the investor also loses money in transaction fees. The same happens when he/she decides to buy another stock because ‘it could be better than the first one in terms of performance.’ On the contrary, keeping the same stock for a longer period would save the investor both selling and buying transaction fees, and would allow him/her to realize a capital gain in the future when it will make sense to sell it.
Are there any alternatives then?
There are basically two choices for the investor to choose from:
The first is that an investor buys a stock and decides to keep it over an extended period, let say a few years at least. He/she has, therefore, to discipline him/herself by not selling his/her stock when it is low and repeating the same mistake by buying another stock and selling it again when it is low.
The second is that the investor leaves monitoring the market to professionals that have enough experience to deal with lows and highs in the stock market. And alternatively, he/she invests in mutual funds that are managed by professional portfolio managers. An investor can still invest in stocks but through a mutual fund i.e., a company that invests in whatever stocks the portfolio manager feels suitable in terms of risk and return for the majority of the mutual fund’s clients.
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