On... a Risky Business

I told a good friend of mine that I was going to start investing in the stock market and his response was far from unexpected. "You're either going to make a lot of money or lose a lot of money. The stock market is risky". Is it truly though?


Generally, risk can be defined as a permanent loss of capital. That also usually happens when you don't know what you're doing. So, is investing in the stock market a risky business? Based on the two criteria I mentioned, I would say it depends (meaning it can be risky or not risky). Confused?

First criteria - permanent loss of capital. Sure, you can lose money investing in the market but..... how much you lose depends on you. Say you invest in a property which costs 500,000$ and the price of the property drops by 10%, you would have lost 50,000$ when you sell it. On the other hand, you invest 1,000$ in the market and you lost 100% of it. You would have only lost 1,000$ (yes, you can invest as little as 1,000$ and even less). Seems like in an absolute $ amount, the stock market is not really that risky. 

Second criteria - not knowing what you're doing. You most likely will lose money in the market if you invest with zero knowledge. A race car driver drives very fast in a competition. It is risky but not so if he has the skills and the safety equipment to mitigate the risk. Compare that with someone who doesn't know how to drive at all, driving in normal traffic. Which one is risky? You wouldn't drive on the road if you don't know how to drive, why would you invest if you don't know how to.


Investing can be a risky business, but it doesn't have to be. And on the contrary, "either you make a lot of money or lose a lot of money" are extreme outcomes when you invest. More often than not, it's somewhere in between.