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Lesson 11. How to Pick Stocks > Market Risk - Pg. 65

How to Pick Stocks Tip 65 Market risk is the danger that your stock's performance will be skewed as a result of the conditions of the markets in which it trades. This effect means that, to some extent, when the entire market goes up, your stock probably will too; and when the entire market goes down, your stock probably will too. This rule isn't set in stone. Some investors make a killing on the same day others are losing their shirts, but realistically the movement of the market is nothing more than a summary of the movement of the stocks within it. Finding a stock that behaves differently from the rest of the market, then, is going to be very difficult to do. The risk here is that while your stock may be well thought out, in a really good company, and ready to grow, the pull of the market, should it go down, could be strong enough to take your stock with it. Think of it like all those lifeboats floating around after the Titanic went down. They were floating fine on their own; it was the pull of the Titanic that sucked them under. The second part of market risk lies in trying to sell your stock. When the market is spiraling down, quite frankly, there aren't a whole lot of people who are looking to get in. While conventional wisdom holds that this is exactly the time people should be getting into the market, few do. As a result, you may have a very difficult time trying to sell your stock. This is referred to as an illiquid market. Tip An illiquid market, or a market in which few people are buying and/or selling stock, usually occurs when stock prices are shooting up or plummeting down. If prices are plummeting, it's a good time to buy more stock. Attempting to sell your stock under these conditions usually means that you will have to pay larger transaction fees, reduce the price you will accept for the stock, or anything else you can think of to make your stock more attractive to potential buyers. This, of course, means a loss of money to you.