You probably know some people who refuse to invest in the stock market because "it's too risky." Are they right? Well, stock market investing certainly does have some risk. But that risk is enhanced when you don't know what you're doing or why you're doing it.
Shares of stock are valued based on the value of the companies that issued them. If you buy stock in the Whoa Nellie Brake Co. (ticker: HALTT) and it declares bankruptcy, you're probably going to lose money. Most well-known, growing companies don't suddenly go out of business, though. (Think of Coca-Cola, IBM, AT&T, Wal-Mart, and the like.) Look at a graph of the stock market average over many years and you'll see that it's a zig-zaggy line. The zigging and zagging is volatility. It's risk. But step back and look at the graph and you'll see that the jagged line slopes upward over the long haul. Despite the risk, it gradually gains in value.
You can probably afford to take on some risk by investing in stocks -- as long as the money invested won't be withdrawn within the next five or more years (ideally, and to be more conservative, 10 years). If you'll need the money you're investing for college or a house down payment in two years, stocks aren't a good idea -- the market could drop in the short term. But, if you're investing for the long haul, you can patiently ride out downturns. Short-term investors should stick to safer plays, such as money market funds.
Even if you're nearing retirement, odds are that you won't be tapping most of your nest egg for at least five years. So, much of it -- the long-term portion -- can still remain in stocks. Don't assume that just because you're in or near retirement you need to completely withdraw from the stock market.
Investing in stocks is certainly not risk-free ... but that doesn't necessarily mean it's smarter to park all your money in an ultra-safe spot like a money market fund. The more you learn, the more you can manage risk. For example, know that you needn't spend time focusing on individual stocks if you're not so inclined -- the best investment for most folks is an index fund.
To learn more about investing Foolishly and how the business world works, visit our Fool School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides (which feature money-back guarantees). You can also learn all about brokerages and find one that's right for you in our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?)
