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Before you start to invest in penny stocks and the stock market, you must understand the risks… Here's how

by , 16 April 2015

Investing in penny stocks and any other shares on the stock market comes with risks.

Before you invest a cent, you need to weigh up the risks involved.

Here's why and how to do it…

Planning your journey into the stock market and penny stocks

Before you begin investing, you should know what your motives are in the first place.

Investing in penny stocks and other shares gives you opportunity to take advantage of inflation-beating returns over the long-term. But over the short-term, the stock market can fall in value.

Yet as long as you plan your investments, you can offset these negative moves.

Why are you investing?

It’s vital to have goals underlying your reasons for investing.

For example:

  • Are you looking to invest for your retirement?
  • Are you investing for an income?
  • Are you investing to raise money for a particular long-term goal?

You also need to look at how much risk you’re comfortable taking on. And if you’d consider more short-term investment and trading strategies.

How much investment risk can you handle?

Your personal risk profile will have a big say in how you invest. When investing in penny stocks, for example, your risks are higher than investing in stock market giants, so this is a big consideration.

To work out your risk profile, ask yourself:

  • How much can you afford to lose of your investment?
  • How long would you be prepared to wait for the market to correct?

The golden rule of investing

You should only ever invest what you can safely afford to lose. This means you need to keep enough money to cover your ongoing expenses and only use disposable income.

Of course, once you begin investing, you can use stop losses to limit your losses. A stop loss means setting a level at which you’ll sell if a share falls by a specific percentage amount.

Bottom line: Investing comes with risks and when you invest in shares like penny stocks, these risks are higher. Before committing any money to the stock market, you need to understand these risks.

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Before you start to invest in penny stocks and the stock market, you must understand the risks… Here's how
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