Question

Why is investing in the stock market riskier than saving cash or bond investments? Describe one way to mitigate, or lessen, that risk.

Answer 1

If the company performs badly, or there's a perception it does so, then the stock's value will go down and you'll lose money. The only way to earn money from stocks is if the company is able to be innovative and survive the competition. The worst case scenario is that you lose all your money if the company goes bankrupt.

To reduce the risk, you should diversify your investments so that you invest in multiple companies along multiple sectors of the economy. This spreads out the risk so that if one company fails, then its unlikely they all fail (assuming there isn't some catastrophic event in the market). Alternatively, you can invest with mutual funds or index funds to let other people/entities invest your money with a range of diverse companies.