Risk in Stock Market:
Investing your money in a stock market is not as safe as cash or a Bank deposit, and it involves various kinds of risks. Though compared with the return given by the stock market and traditional method avenues like gold, funds, bonds, or other options, the stock market provides the best returns but even can lose out the real money in stocks. So successful investing calls for managing risks and not avoiding them.
Many investors are scared from the stock market because they do not understand the different types of risks associated with stocks. For example, proper training is required before going deep water swimming; similarly, knowing about various risks before investing in stocks is a prerequisite. Risk management does not guarantee a return but at least provides a way to mitigate them or have a backup plan.
Types of Risk
Here are the Top 10 Risk which involved while investing in Stock Market:
It is one of the most apparent kinds of risks as the economy can go anywhere at any given moment. Any major market Bubble or terrorist attack can result in market indexes losing a significant percentage. A strategy must be created to write down these downturns by investing in a reliable company that performs well in the long term and whose capital can be liquidated during the crisis. Foreign stocks can be a good option from a globalisation perspective and earn profit overseas by preventing a national economic crisis. Similarly, for older people nearing retirement, their portfolio asset allocation should be shifted to fewer risk avenues like bonds and fixed income securities.
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The other name for this kind of risk is the systematic risk which is based on day-to-day price fluctuations which happen in the market. The volatility in the market index like Sensex and Nifty affects the return from a company’s stock. If the index is going down, it can even lower the prices of some excellent stocks. This kind of risk is more with short term investors as compared to long-term investors. Other factors which have an impact on the stock prices are Earning per share of the company, demand and supply, price to earnings ratio, and the impact of news or investors’ demographics.
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There are several industries and companies listed on the stock market, all having different backgrounds and sectors like from telecom sector, energy sector, Pharma sector, agriculture sector, essential service sector, financial sector and many more. So, many of these companies are regulated or governed by different governing bodies or can have government involvement in running their business. Irrespective of the company’s performance, any change or news by the regulator or the government can significantly impact its business and its stock resulting in a sharp rise or fall in the stock price.
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Inflation in the price of different products and services are commodities in the market. When inflation Rises, companies spend more to procure the same amount of raw material which they used to get for a lower price earlier, and such a rise has an impact on the purchasing power of the company, which affects the overall profitability and causes the stock price of a company to fall. This is a kind of risk borne by all the companies irrespective of their share or performance. Companies involved in construction or commodities like oil or pulses are affected by inflationary risk.
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Interest Rate Risk
It is a type of risk for which this change in the interest rates has a direct impact on losing money. The open market or Global Market interest rate frequently changes, which can have a positive or adverse effect on the stock depending on which direction the interest rate is moving. So, if the interest rate is higher, then a company will have to pay more to borrow money at a higher rate and vice versa. Similarly,
The bond market declines when the interest rate Rises which has a direct impact on the corporate bonds of the company.
Like regulations are imposed by the government, there are taxability rules set on the companies whose stocks can be purchased. So any stringent tax rule based on the economy’s needs affects the stock price whose sector’s tax laws are altered. So, for example, a new tax levied on the company’s stock or an increase in the existing tax may lead to a fall in the stock price of the company.
It refers to how quickly the stock can be converted into cash. A
regular income from the stock investment is preferred, and solvency and liquidity must be checked for investing in a dividend offering company. A company having liquidity problems can cut down the dividend or find it difficult to clear the bill to repay its debts, which can lead the company’s stock price to fall drastically.
This is a risk associated with the company’s internal operations, which are facing a hurdle. Reasons like the poor quarter result, machinery breakdown,
employees on strike, failure of Management etc., fall under business risk. This kind of risk can be dealt with by having a diversified portfolio of stocks, and it is always good to not keep all your eggs in one basket. Having one company perform poorly can be compensated with all other good performing companies in the portfolio.
Market Value Risk
It is a type that refers to what happens when the market turns against or ignores the investment done by the investor. It occurs when the market goes off chasing the trendy thing and leaves behind good companies. When investors stampede out of the market, good and bad company stocks are affected. Some find this as an opportunity too for loading the portfolio with good supplies at lower prices. So spreading the investment in different sectors helps get a chance to participate in the growth process of good companies and fetch good returns from their stocks.
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Risk of being Conservative
There is a difference between a conservative and a careful investor. While the former refrained from taking any risk, which leads to not reaching the financial goals on a timely basis, the latter keeps everything in mind and rebounds if the market turns against them and accomplishes the financial goals on a systematic and timely basis.
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Nevertheless, after understanding the basic concept behind every risk, it can be controlled well and awarded to clever and calculated investment decisions. We hope this article helped us know the various risks involved in stock market investments.
Frequently Asked Questions (FAQ’s)
1. What are the different types of risk in the Stock market?
Ans: Interest rate risk, equities risk, commodity risk, and currency risk are the most prevalent forms of market risk. Interest rate risk refers to the potential for interest rate variations to cause volatility, and it is especially relevant to fixed-income assets.
2. Is there any risk in investing in the stock market?
Ans: A substantial increase in inflation rates can have a negative influence on a company’s profitability, resulting in a reduction in stock values. Other hazards include political risk, social risk, currency risk, and so on. In layman’s words, a variety of variables can influence stock prices.
3. What is investment Risk in investing?
Ans: The chance or potential of experiencing losses in relation to the projected return on any given investment is known as investment risk. Simply said, it is a measure of the extent of uncertainty in obtaining the investor’s expected returns.
4. What are the Risks in Stock Market?
Ans: There are many risks in Stock Market but here are the top 10 Basic Risk involved in Stock Market:
- Economic Risk
- Market Risk
- Regulatory Risk
- Inflation Risk
- Interest Rate Risk
- Taxability Risk
- Liquidity Risk
- Business Risk
- Market Value Risk
- Risk of being Conservative