Stock trading is often compared to gambling, in relation to the uncertainty that follows like a shadow. It is all a game of luck. If you have luck on your side you may become a millionaire or you could become penny less. There are no guarantees.

We start by defining stocks. Stocks, also known as shares, on the other hand do not have a fixed value. There are different types of stocks. Stockholders are not necessarily paid a dividend. Usually firms save any profits left after interests and taxes, in order to finance growth, or new projects. Stocks make the stockholder part owner.

Ordinary stocks carry voting rights but they do not have a fixed dividend. In fact in some years they may not get a dividend at all. Dividends are usually announced upon the decision of the board of directors of the company. Ordinary stocks are usually the last ones to be paid a dividend.

Another type of stock is the preference stock. This stock gets a preference over ordinary stocks when dividends are announced. They carry a fixed percentage of dividends and do not have voting rights.

Stocks have a higher yield but are more prone to market fluctuations. For this reason they have higher risk than bonds.

The best way to protect yourself against losses is not to put all your eggs in one basket. Rather you should choose a variety of stocks and invest small amounts in each of them. This reduces your risks, since when stocks move in opposite directions, less value is lost.

Do not forget to study the company well before investing your money in its stocks. Always follow them closely. Look for company's who have a stable stock value and a bright outlook.

Investing in mutual funds is another way of diversifying your risks. In mutual funds, a number of people put in their money and then buy shares of a number of companies. So this reduces the risk.

What happens is that when you make a portfolio of different stocks, one stock alone can not ruin you. Even as one share value goes down, another may be moving up and thus balancing out your loss.

Of course we have to realize that if all our stocks fall in value, stock trading is not out thing! So better try your luck somewhere else.

Learn more about this author, Khadija Abbas.
Click here to send author comments or questions.

---

Add your voice

Know something about Diversifying your risk in the stock market?
We want to hear your view. Write now!