Are stocks safe or can you lose all your money?

Normally Google allows you to see the search terms that has caused someone to end up on your blog. This morning, I saw this question on my Google feed and thought I should answer immediately:

YES! You can lose ALL your money…

Let me explain how this happens…Stock market

When you invest in a stock you are investing in a share of the company with the hope of sharing in the profits of the company after all costs have been paid. There is no guarantee of a profit, or, if there is even a profit, that you will get a share of the profit.

The share of the profits of the company that you receive is called a dividend. The directors of the company decide whether or not to pay a dividend. This decision is normally made each year or sometimes, each quarter. The directors have the option of not paying a dividend and using the profits for something else, such as buying more operating equipment, for example.

If the company continues to reinvest the profits and the company goes bankrupt, liquidators have to decide who is entitled to the assets of the bankrupt company. These assets are sold and the proceeds are distributed between parties who have a stake in the company. Unfortunately, shareholders are paid last, after all debts and other commitments are paid. Most of the time, there are no assets left over to return any money to shareholders. Shareholders would have lost all their money.

In some countries, there is also something called a “reorganization”. This happens when the debtholders (the parties the company has borrowed money from) are not paid. Debtholders have priority over shareholders and can force a company to go into reorganization. When this happens, all the shareholders are “wiped out” from the books and the debtholders end up owning the company. You would have lost all your money from investing in this stock. This is the reason you should always check on how much debt a company has before investing.

Investing in stocks is a good way to build wealth, but it is also fraught with danger. If you are new to the field of investing, it is best to speak to a financial adviser or wet your feet with collective investment products such as ETF’s or Mutual Funds/Unit Trusts.

Kevin Mzansi