If share prices fall, you run the risk of losing money.

Investors in some companies can simply decide, for any reason at all, that the company is no longer worth its price and if enough of them think that, shares will fall in value. Shares can also fall when the economy is declining as investors expect profits to be lower.

At any time individual companies face the risk of accidents, industrial disputes, loss of market, product recalls, poor management decisions and court cases. Customers can simply change their minds and stop buying. Suppliers may raise prices or start demanding cash on delivery. Bankers can decide to put up interest rates or stop lending to a company altogether.

Outright business failure

Especially in the early years, many businesses fail. If a company you invest in goes into administration your shares may become worthless. Shareholders are last in line for any proceeds. Employees, the tax office, secured and unsecured creditors are all fully paid out before the shareholders, as owners, get anything.

When a company goes under, shareholders usually lose everything. Claiming the capital loss may be the only consolation!  (Sometimes the shell is sold and the company recapitalised by new promoters. Existing shareholdings are consolidated such that shareholders end up with about 5% of the "new" company and the residual value of their shareholding is negligible.)

Dealing with fall in value

It is also worth noting that apart from those companies that go bust, shares that have fallen in value can recover over time. Sometimes if a share has fallen in value it can be worth holding until it recovers. At other times it may be better to cut your losses and invest in a company that has better prospects. The option you choose will depend on the company you are invested in and your individual circumstances.

Negative returns some years

Please note below the negative returns in the years 2002/03 (Australian shares) and 2001-03 (international shares).

FURTHER READING:

Snakes & Ladders, a guide to risk for savers and investors by Mary Holm