Assuming that you are able to justify the investment(s) you make by impersonal, objective reasoning, every investor still knows that there is a degree of risk involved when an investment has been made in a certain company. This is what I refer to as the risk of your personal stock holdings.
I distinguish two types of risks regarding to your personal stock holdings:
- The risk regarding sudden events;
- The risk regarding holding your stocks.
Before exposing the risks of holding your stocks, I would like to point out that I included a personal comment and a recommendation regarding these risks, in the notes at the bottom of this article.
1. Sudden Events
We probably all have seen a stock price plummeting due to the information presented in a company’s press release. Although I cannot promise you that this will never happen to you (again) – I can reveal a free and powerful tool which I use to monitor the press releases relevant to my stock portfolio. By clicking on the link provided you will be redirected to the page which explains exactly how you can use this tool for your own benefit. Using this tool helps you react faster to these sudden events, thus increasing the possibility to minimise your loss.
2. Holding Your Stocks
Another type of risk related to your personal stock holdings involves the risk of the stock ownership itself. To demonstrate this type of risk, I have gathered some interesting articles which I recommend you to read. The first article: Holding Your Securities, explains the three possibilities which exist when it comes to holding your stocks:
- Physical Certificate – The security is registered in your name on the issuer’s books, and you receive an actual, hard copy stock or bond certificate representing your ownership of the security.
- Street Name Registration – The security is registered in the name of your brokerage firm on the issuer’s books, and your brokerage firm holds the security for you in ‘book-entry’ form. Book-entry simply means that you do not receive a certificate. Instead, your broker keeps a record in its books that you own that particular security.
- Direct Registration – The security is registered in your name on the issuer’s books, and either the company or its transfer agent holds the security for you in book-entry form. The Direct Registration System (also known as DRS) allows investors to transfer securities held this way.
Depending on which method your securities are held, your risk level varies. Most investors hold their stocks in the account of their broker/dealer (street name). Although this is by far the easiest and most practical way to hold your stocks, you must understand that this method carries by far the highest level of risk, as your stock ownership can only be proven through the records of your broker. Logically, physical stock certificates are the least riskiest way to hold your securities.
If you actually have physical stock certificates in your possession, you run the risk that the stock certificates are lost or stolen. In the article Lost or Stolen Stock Certificates you can read all about what to do in these situations.
If your stock broker goes bankrupt you are protected by the Securities Investor Protection Corporation (SIPC). You can read all about the SIPC by clicking on the link provided. Please keep in mind that the SIPC coverage is limited to $500,000 per customer (including up to $250,000 for cash) and we must assume that the funds of the SIPC are sufficient to cover the loss of all the customers affected by the specific bankruptcy.
Note: It’s my estimate that it is highly unlikely when one or more of the major stock brokers go bankrupt, that the funds of the SIPC are sufficient to cover the losses of all the customers affected by this specific bankruptcy (or bankruptcies).
Note: Although my own stock broker holds my securities in ‘street name’, I recommend you to consider holding your stocks – especially those which you intend to hold for the long term – through a physical certificate.
You may also want to read...
- Mining Companies Analysis - Learn How to Invest in Mining Stocks. To execute your own mining companies analysis, I have created a lot of (sub)pages about the relevant terminology and working methods from the mining sector.
- Oil and Gas Companies Analysis - How to Invest in Energy Stocks. I created different pages about the relevant terminology and working methods from the energy sector to conduct your own analysis for oil and gas companies.
- Understanding the Stock Market - How Do Stocks Work. To help you with understanding the stock market, I have created some articles to explain how stocks work and I also reveal my own stock market analysis in this chapter.
- How to Invest in Shares - Learn How to Start Investing in Stocks. In this chapter I inform you how to invest in shares - the UndervaluedEquity.com way. I also reveal which (free) resources I use to execute my due diligence.
- How I Invest in Stocks - My Preconditions for Selecting Undervalued Stocks. In this chapter I answer the question: how do I invest in stocks? Thus, I explain which investment rules I follow whilst selecting companies for my stock portfolio.
- Stock Investment Analysis - A More Detailed Elaboration on How to Buy Stocks. When a company complies with my preconditions for selecting undervalued stocks, I will elaborate my stock investment analysis to assess the quality of it's assets, management, etc.
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