Rightly said “if you don’t risk anything, you risk more”, but when you have your hard-earned money at stake, is it worth taking the risks? Maybe, maybe not. Just like in life, there are not only colourful movements, the stock market also comes with some stock market risks.
On one hand, where is it essential to be daring and take risks in the market, it is also essential to shield oneself to prevent major losses. To do the same, it is essential to acquaint yourself with the knowledge and understanding of how stock market works and the risks associated with the investment in share market.
So, let us begin!
What Are The Risks In Stock Market
When an individual enters the stock market, he/she has different financial goals and requirements. According to this, there are various trading styles and different segments in which a trader or an investor can focus.
Because of the different types of share market investment, there are also different risks associated with it.
But what is stock market risk? There are majorly two risks, market risk and specific risk.
Now the market risk is the situation in which the money utilised in the investments undergoes some losses due to several factors involved in it.
Now, these factors can range from geopolitical, political, economic, and even emotional. Here the impact is on the entire market and not just a specific stock.
Apart from the market risks, there are specific or unsystematic risks as well. Now in this, the performance of a particular security is hampered. So, even if one share is not performing well, it isn’t necessary that all the others will also suffer.
So, if you are looking to start investing in the share market, then let us have a look at the various investment risks.
Risks Of Investing In The Stock Market
Traditionally a lot of people are used to investing their money in fixed deposits, gold, real estate, etc. But in recent times, the will and interest to invest in the stock market have also increased.
But due to the lack of knowledge, a lot of investors often miss out on red flags and end up losing their capital. Let us, therefore, have a look at the types of stock market investment risks so that it becomes easier to manage them.
1. Market Risks
We talked about the market risk in brief in the previous section. But let us now look at it a little closer. This is when the value of your investment declines in general because of various factors. There are different types of market risks.
Share market involves investing in equities or shares in general. As the market fluctuates all the time, it is obvious that the share prices also vary. So the risk of losing the investment amount because of the constantly changing prices of equity is known as the equity risk.
Interest Rate Risk
Any change in the interest rate can also possess a risk to your investment amount. This is the interest rate risk. Now the fluctuation in the interest rates can be due to multiple factors including a change in the monetary policies of the government or any other announcements impacting the overall financial situation.
The most common investment instruments that are affected due to th changing interest rates are bonds or any similar investment product.
- Currency Risk
A lot of investors invest and trade in different currencies across the globe. The prices of one trading currency can fluctuate against the other currencies. So, there is a high risk of losing money with the change in the exchange trading rates. This is called the currency risk.
These are the risks associated with trading commodities. There are various agri and non-agri commodities available for trading in India. Any change in the prices of the same possess risks to an investor’s capital.
2. Liquidity Risk
Apart from the market risks, there is also a liquidity risk. But what is liquidity in terms of the stock market? It is the potential of entering and exiting without causing any changes in the price.
Liquidity risk, therefore, means the inability of an investor to easily purchase and sell the stocks. The stocks with low liquidity often lead to losses as an investor cannot enter or exit the stock at the right time.
The liquidity risk is a common one and when the investors don’t pick the right stock for long-term they can often face such situations.
This situation can often bother intraday traders, therefore it is important to learn and then proceed. You can also read best book on intraday trading to get a better idea.
3. Concentration Risk
A lot of people don’t diversify their portfolios and put all their capital in one asset. This can often lead to losing or risking the capital even if a single thing goes down south. Therefore, concentration risk is the risk of losing your investment due to the lack of diversification.
4. Credit Risk
Imagine you invested in a bond but the company or the governing authority failed to pay the interest? That is a credit risk. This can arise due to various factors including any financial crisis on the company or any other fraudulent activity.
It is essential that you research before investing your capital in an asset.
5. Inflation Risk
Inflation risk is that one risk that is not applicable only to stock market investments but also to other investment products as well. At any given point of time, the prices of an asset or an entity change. This is the inflation rate.
Just in case your investment does not keep up with the inflation rate and the value decreases over time, you can lose your money. It is therefore essential to keep a check on the inflation rate as well.
These are some of the major risks that an investor can face in the stock market. But is there a way in which you can manage the same?
Other than the tips for stock market investment it is essential that you learn how to understand and then manage the risk as well.
Share Market Risk Management
Managing the risks is very essential in the stock market as it shields you against major losses and increases your capability to multiply your profits. Now that we have understood the various stock market risks, let us have a look at how you can effectively manage the same.
- Diversify your portfolio- It is rightly said, “never put all the eggs in a single basket” and this is applicable to the stock market as well. If you want to enhance your chances of profits, it is important that you diversify your portfolio. This means that you should not invest all your capital in a single asset.
Depending on your financial goals, age, and other factors, you should divide your investments into various asset classes.
This makes sure that even if you are suffering losses in one of them, the other ones are there to manage the rest. Even when you are just investing in the stocks, make sure that you are not investing all your money in the stocks of a single company.
- Understand the trend of the market- Can you earn money in the share market? Is share market profitable? It can be if apart from diversifying the portfolio you make efforts to understand trends of the market. Often the investors are mistaken and take decisions ignoring the trends of the market, often leading to high losses.
You can specifically do a quick technical analysis to determine the trend of the market and then ride the profit train. In most cases, you should avoid going against the market trend.
- Keep An Eye On The Market Happenings
There are various geographical, political, economical, factors that play an essential role in determining the trend of the market. If there is any news related to a company, it is possible that the prices of the stock will also fluctuate. Therefore, if you do not want to get shocked by seeing any sudden market fluctuations, it is essential for you to observe the market closely.
- Always use a Stop-Loss
The whole idea of risk management is to minimize the losses or make them almost negligible. Therefore it is essential that you always use a stop-loss for your trades. As the name suggests, it will stop your losses at a pre-determined price.
You can set the stop loss according to your risk appetite and your financial goals. this will help you in managing your risks well.
With high reward potential, the risks are also high in the stock market. Therefore, if you guard your capital against the risks very well, you can earn great profits in the share market.
This becomes even more important in the shorter format of trading and thus, is highly recommended for you to use stop loss. Here it is important to know that is stop loss only for intraday trading.
Just like the million opportunities that the stock market brings with itself, it also comes with some risks. Majorly consisting of the market and specific risks, the stock market can garner some losses as well if you do not work on the risk management of your investments.
If you know about the risks, it certainly becomes easier to master the art of managing them. So now when you are well acquainted with the risks of the stock market, you can now start investing in the stock market and ensure that your losses stay at a minimal level.
Want to begin your stock market journey? Open your Demat account today!