Is the stock market risky?

[imbijibi]

I've never done it. Is it a good idea to invest in New companies? Or buy from companies that are doing well?

[David]

Wow, a legitimate, purposeful question that goes right to the heart of investing. Not many newbies have the insight to focus on risk before profits. Focusing on profits that you have no ability to make is a pipe dream. Focusing on risk will save your bacon, and the profits will eventually come.

If you were to take a college entry level Economics 101 class, you would learn that money market instruments like a savings account in a bank or CD's are the least risky, but they have no real potential to grow your money at 1% per year. Gov't bonds are a little more risky with a little better return at 2% or 3%. Still, risk is near zero unless the gov't goes out of business. Neither of these choices will cause you to lose any of your initial investment.

But with stocks, you could lose ALL of your money if the company goes bankrupt, even with established companies like Enron, or Frontier Airlines or CompUSA, or many of the tech and internet companies from the dot-com era in the early 2000's.

So it's very risky to invest in startups and "New companies." Stay away from IPO's (Initial Public Offerings) like Twitter, and avoid penny stocks like a plague. You want established companies with a good product or service and good earnings and good liquidity.

The best way to learn is to read a good book or ten. Start with Investing for Dummies, available at your local library for free. This knowledge will be your financial guide for your entire life. It's always a good idea to develop a plan rather than leave everything to chance.

One way to manage risk is to use a stop loss order. Use Investopedia or Wiki to define financial terms.
http://www.investopedia.com/terms/s/stop-lossorder.asp

Other ways to limit risk is to limit position size and avoid leverage (margin), especially until you get a good feel for what you're doing. The newbie focusing on profits and getting rich quick compounds mistakes with leverage and blows out quickly. You, on the other hand, have a shitload of common sense, and just might stick around long enough to learn something.

One more way to manage risk is to be out of the market when risk is high. There are many ways to monitor risk, but if the Dow or your stock is in an uptrend, be long. If the uptrend is broken, get out. This is called position trading or swing trading, and you might make 5-10 trades per year.

You cannot manage risk by investing in a mutual fund or buying an index fund. By simply buying and holding a market etf like the SPY or DIA, you can trade it like a stock and simply get out when risk is high.

[Bobby Crosby]

You should invest in a mutual fund, or a "fund of funds" which is a fund that contains other funds. These are slightly less risky than plain old stocks as they spread money around in multiple stocks.