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I am thinking about investing some money each month into stocks that pay a dividend. I have never done anything like this before so I don't know what I am doing.

Every time I ask someone about the risks of investing, they always tell me that I could lose all my money. That is not specific enough for me. So my question is, what are some ways that I can lose all or part of my money? Secondly, how can I protect myself?

For example, I have heard about dilution and that companies will often miss paying dividends. How can I protect myself against dilution, and missed dividend payments, as well as other risks.

I don't need a long answer, bullet points would be fine. I just need to be pointed in the right direction so that I can research the details. Thanks.

  • Ever look at the stories of companies that imploded like Enron, Worldcom, etc.? Some of them paid a dividend and people still lost a lot of money there when the company died. – JB King Jan 23 '17 at 22:28
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I'd recommend investing in a mutual fund that diversifies your purchase across a number of stocks (and bonds, depending on the fund). Vanguard has some of the lowest fees around, and have a large number of funds to choose from. Take a look at their offerings for a data point if nothing else.

  • Welcome to Money.SE. Nice first answer. Funds or ETFs, but the key is a combination of low costs and diversification. – JoeTaxpayer Jan 23 '17 at 0:06
  • With mutual funds or index funds, is there a risk of dilution? What happens in the case of liquidity? What other risks are there and how do I protect myself. – Lumo5 Jan 24 '17 at 7:19
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If you buy stock in established companies, it is vey unlikely that they will lose all their value. Spreading your money across multiple stocks -- diversifying -- reduces that risk because it is extremely unlikely that they all lose all their value at once. Spreading them across multiple industries and adding bonds to the mix increases diversification. Of course the trade-off is that if one of the stocks skyrockets you don't benefit as much as if you had been lucky enough to put all your money in that one stock.

You need to decide for yourself how much risk you are willing to tolerate in exchange for the chance of gains.

Other answers on this site have dealt with this in more detail.

  • Is there a risk of dilution? What happens in the case of liquidity? What other risks are there and how do I protect myself. – Lumo5 Jan 24 '17 at 7:19
  • Sounds like you don't know what "liquidity" is; you might want to correct that and then reconsider the question. – keshlam Jan 25 '17 at 21:24
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When you buy shares, you are literally buying a share of the company. You become a part-owner of it.

Companies are not required to pay dividends in any given year. It's up to them to decide each year how much to pay out.

The value of the shares goes up and down depending on how much the markets consider the company is worth. If the company is successful, the price of the shares goes up. If it's unsuccessful, the price goes down. You have no control over that. If the company fails completely and goes bankrupt, then the shares are worthless.

Dilution is where the company decides to sell more shares. If they are being sold at market value, then you haven't really lost anything. But if they are sold below cost (perhaps as an incentive to certain staff), then the value of the company per share is now less. So your shares may be worth a bit less than they were. You would get to vote at the AGM on such schemes. But unless you own a significant proportion of the shares in the company, your vote will probably make no difference.

In practice, you can't protect yourself. Buying shares is a gamble. All you can do is decide what to gamble on.

  • I heard there is something called compliance, which forces companies to pay missed dividend payments at a later date. Also, they are forced to pay a certain percentage. I saw this on youtube. Is it true? – Lumo5 Jan 24 '17 at 7:21
  • So there is no way to mitigate the risk of dilution? What other risks are there? – Lumo5 Jan 24 '17 at 7:22
  • @Lumo5 The company can decide what dividend they wish to pay each year. They may choose to set that dividend to zero - that's not the same as missing a dividend. As a shareholder, you can to vote on how the company is being run at each AGM. But as a small shareholder, your vote would be irrelevant - the larger shareholders could out-vote you every time. – Simon B Jan 24 '17 at 12:24
  • @Lumo5 As for dilution, there's really nothing you can do but vote against it. Which, as noted earlier, is unlikely to make any difference. Or sell the shares and buy something else instead. – Simon B Jan 25 '17 at 13:17

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