Risks and Taxes

March 19, 2026 • Beginner

While stock investing has the potential for gains, investing in stocks comes with risks too.

Interested in stock investing?

Risk

According to the Schwab Center for Financial Research: "Investment risk, and managing it well, is critical to investing."

Knowing your comfort level with potential losses and building a diversified portfolio based on your tolerance for risk are useful investing principles. There are several risks that come with investing in stocks. Understanding them and ways to manage them is crucial.

Types of risk	What is it?	How to manage
Company risk	The potential for a stock to decline in value because of a company-specific concern. For example, if a company doesn't perform as well as expected or doesn't keep up with its competitors.	Have a solid understanding of the company's current financial footing and potential for future growth. Choose high-quality companies. Diversify across various categories of stocks.
Liquidity risk	The risk that you may not find a buyer for the stock you're trying to sell or trouble purchasing a stock at or near your desired price.	Focus on easily tradeable stocks with high trading volume or number of shares typically traded on a daily basis. Some stocks may also trade outside of typical trading hours, and it's important to note that liquidity risk can be higher in extended-hours or overnight trading sessions when there are fewer people buying and selling.
Market risk	The risk of financial loss due to the ups and downs of the broader market, which can be influenced by factors beyond an individual company, like interest rates, politics, or commodity prices.	Diversify your stock holdings by investing in companies of various types and sizes. Further diversify by buying various asset classes, like bonds.

Please note this list is not meant to be exhaustive. Be sure you do your research in order to fully understand what you're investing in.

There are other stocks beyond the big names that can have additional risks such as penny stocks—also known as over-the-counter (OTC) stocks. These types of speculative stocks typically trade for less than $5 per share and are typically not listed on U.S. stock exchanges. Penny stocks have a higher-than-average risk, which stems from two main factors: lack of information about the company and low liquidity. This can make penny stocks and similar speculative securities particularly vulnerable to fraud, and they can make this a type of investment novice investors may want to avoid.

Taxes

When investing in stocks, you also have to consider taxes, which can impact the growth of your portfolio. Depending on the type of investment account you're using, if you sell an investment for more than you bought it (that is, for a profit), you potentially create a taxable capital gain, or the difference between the sale price and the purchase price. Taxes can be complex and vary based on a lot of factors, so it's always best to consult the IRS or a tax professional to understand your specific situation. With these risks and considerations in mind, the next lesson will focus on how to research and choose stocks.