Each investment carries some degree of risk. All investments can lose value if the market declines, whether it is equity, upcoming IPOs, bonds, mutual funds or exchange-traded funds.
In the stock market, uncertainty is the biggest risk concerning your investments that can affect your financial welfare hugely. For example, your investment may increase or decrease the value because of market situations. It can be corporate decisions, like business expansion or a merger with another company, that can affect the value of your investments. If it is a company dealing in the international market, political issues and currency fluctuations can impact your stock investments.
Risk and returns in the stock investments go hand-in-hand. Therefore, knowledge is necessary before you start your investing journey in the stock market.
Types of Risks
Different types of risks that investors should familiar with are as follows:
1. Market Risk
The demand and supply determine the stock price on stock exchanges. Hence, the price of the said stock fluctuates numerous times within the day. Stock investors gain through dividends or by selling their stocks at a higher price. If the stock price is low when you need to sell the stock, you may have to bear losses. This is called market risk.
2. Interest Risk
The interest rates keep changing on deposits and loans as per the economy’s condition. If interest rates decline, it indicates an economic slowdown and companies may suffer huge losses. Therefore, there is an interest risk in the stock market.
3. Company Risk
If the company you invest in is going through hardships in its business, the stock price can decline significantly. Therefore, such can lead to a drop in your investment value.
4. Regulatory Risk
In an economy, there are various sectors governed by regulatory bodies strictly, like pharma, tobacco, telecom, etc. Any reform brought in policies can impact the companies in these sectors, causing a price decline.
How to Manage Stock Investment Risks
Research the Company Before Investing
Researching about the company before investing is important to manage the risk of investing in stocks. Investors look at the financials of the company. They can check how fundamentally strong a company is. You can start even with one share using your demat account and trading account.
Diversification is the most common jargon that every stock investor must have heard – ‘don’t put all your eggs in one basket.’ If stocks of companies from a specific sector in your portfolio hold a significant amount of money and the sector goes through difficult times, you may end up with huge losses. Therefore, diversification is an effective way to invest in the stock market. Investors need to ensure that they spread the portfolio across multiple sectors. Invest in market stocks in such a manner that if one sector faces a drop, then the other can balance your portfolio automatically. You can consider companies with different market capitalisation.
Do Not Make Emotion-based Investment Decisions
Investors can avail of important information via online educational portals, news channels, blogs, etc., to make research-based investment. Emotion-based investing decisions can be counterproductive. Also, panic buying or selling during an economic slowdown can lead to losses. Therefore, it is necessary to make research-based or data-driven investment decisions. Emotion-based investing is like gambling.
Consider Defensive Stock
Investors can consider investing in companies carrying business of essential goods and services, like healthcare, groceries, etc. These are the necessary products that individuals need to spend on. Stock prices of these companies get less affected by market fluctuations. Therefore, they can reduce the risk to your portfolio.
Thus, you need to understand the market before making the investment. Make sure you invest after gauging your risk appetite. Start investing by opening a demat account with a discount brokerage. The demat account opening online with these brokers is a simple method based on an e-KYC concept.