Top Five Risks of Investing in the Stock Market

Investing in the stock market doesn't come without risk. If this hadn't been clear to you before now, it almost certainly has become clear to you in the last few months as the market has lost huge amounts of money and many once proud companies have gone bankrupt. What are the main risks that face the average investor when investing in the stock market?

Top five risks associated with investing in stocks

1. Economic risk- This is the most basic of the types of risk that comes with investing in stocks, but it also quite often the most important of the risks. An ailing economy puts all stocks at risk, no matter the management team or the brand name strength. Economic risks may not seem too strong at certain times, but during recessions and depressions these become very evident.

2. Being too emotional- This one might sound a little funny to some people, but investing in stocks must be done without emotion. Those investors who make the mistake of involving their emotions in investing are typically the ones who buy stocks when they are at their highs and sell when they are at their lows. Emotions are very difficult to control in investing, but if you can't control them it puts a huge risk on your portfolio.

3. Management risk- There is no doubt that when you involve in the stock market there is a great deal of risk involved with the management team for that specific company or fund. If it's a specific stock then you run the risk of management cooking the books and not providing accurate financial data for you to analyze their strength, or simply management falling behind the curve in their industry. If you are investing in mutual funds management risk comes with entrusting a specific manager or managers to make wise decisions with your money.

4. Not being diverse enough- Diversification won't allow you to go without risk in the stock market, but it sure can reduce the amount of risk in your portfolio. A highly concentrated portfolio has lost a whole lot of individuals a lot of money over the years. Spread your investments out amongst different groups and industries.

5. Inflation- Why is inflation a risk to an investor? If inflation is running rampant the dollars that you are investing are worth much less, giving you a lot less bang for your buck. Many experts believe that inflation is a much bigger investment risk that most investor ever recognize.

These are the top five risks associated with investing in the stock market. The stock market can be a great thing, but one must first understand the risks and their risk tolerance before putting their money to work in the market.