Understanding concepts and risks of investing

The ups and downs of investing.

Concept of investment in the stock market

The underlying question of investing is: “how do you make money?” By investing, you can make money through an increase in price share and dividends.

You can achieve earnings through an increase in price share when you purchase a company’s stock and then the value of the stock increases over the long-term due to business expansion and the repurchases of shares which make each share represent a greater ownership in the business.

Dividends are a portion of a company’s earnings paid out to shareholders (owners of a company’s stock). Investors are entitled to a certain amount of profit per share of stock as determined by the company’s board of directors. It is at the discretion of the company if they decide to pay a dividend.

Stock market investment risk

There are two types of risk associated with the stock market, Systematic and Unsystematic.

Systematic risk involves the entire market and its potential to decline it is also known as market risk. This risk would have to have the market as a whole decline all at once and no matter how much you diversify your portfolio it cannot be avoided.

Unsystematic risk is the potential decline of a single stock value dropping independently of the stock market as a whole. This risk can be minimized by diversifying your portfolio by investing in stocks across many market sectors.

Along with the risks defined above, you must realize there is no guarantee when investing in the stock market. The Average ten-year Standard & Poor’s (S&P) 500 return is nearly eight percent. You may earn more or less but could also lose some or all of your invested money

Michigan State University Extension offers financial management and home ownership education classes. For more information, visit MIMoneyHealth.org.

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