Equity investors also have the freedom to sell their stock in the market and reinvest the proceeds in other companies that may provide the potential for higher returns. Even though equity investors are owners, their risk is limited to the original investment amount. The stock market is volatile. This means the value of the market can rise or fall dramatically in a short period of time. Unlike a government bond where an investor is guaranteed to get back the initial investment at maturity, there are no promises in the stock market.
All stocks are subject to at least two levels of risk.
First, a share of stock will rise or fall based on the fortunes of the company. If business is strong and management is solid, then the stock is likely to rise as profits grow. However, the second level of risk is how well or poorly the market is doing as a whole. A company may make all the right moves in its own business environment, but in times of recession, war or other factors that the company has no control over, the stock may fall. These cross currents will meet in the market place, and the net effect determines whether a stock will rise or fall.