Understanding Stock Market Risks
Where there is no risk there is no gain – as goes a very old saying and it goes very apt for stock market investments. Investing in stocks is taking chance but then life is all about chances. People taking calculated risks go by statistics which show that return on investment for stocks surpass any other investment option if the stocks are held long enough and then released wisely at an opportune moment of market high.
But the trend also shows that when market plunges even the most courageous of investors have been known to be seized with panic and in the flurry of the market confusion have taken some very unwise decisions which have resulted in hefty losses.
The term ‘risks’ also change its meaning depending on the risk taker. High-risk investment for one individual might not be anywhere near so for someone else. It all depends on various factors such as the age of the person, his nature of job, income, his financial liabilities, portfolio, his knowledge of market trends, his attitude, risk sustaining capability, etc.
Risks can actually be categorized into two kinds: investment risk that centers around the big question of what’s going to happen to my investment in case the market goes down and personal risk which stems out of a concern of what’s going to happen to me in case my options go down in value.
Ironically, risk and return are two sides of the same coin.
The higher the potential of your investment of incurring high returns, the higher is the risk involved. As soon as you are investing in stocks you are subjected to various kinds of risks: (a) Market risks is where the stock of the company that you have bought might be doing poor but the market in general might be doing well resulting in your stocks getting appreciated and vice versa. (b) Industry risk is where a certain industry gets affected irrespective of the general market performance. Utility companies are said to be low in risk whereas industries related to Internet and modern technology are said to carry high-risk potential. (c) Regulatory risk is that where a certain industry might get affected on account of certain regulations or laws newly implemented. (d) Business risks involves the individual performance of the company on whose stocks one has invested and purely revolves around the functioning of that particular company in terms of its product, strategies, market share, work force, management, etc.
Stock market risks can be called a complex phenomenon and comes in the form of stock market crashes, currency devaluations, and corporate bankruptcies, changes in market trend, inflation, interest rates and tax policies.
This potency of risks can be effectively alleviated by taking well-informed decisions. An effective way to minimize investment risks is to diversify your portfolio. Investing in various kinds of assets reduces the risk as one company might be faring pretty well while some other might not be performing relatively well. The proceeds of the former company will very much compensate for the losses incurred in any other areas. Holding stocks for a long period significantly cuts down on an investor’s risks. So where too much of speculation is involved, try anchoring your faith on history and hold on to your stocks for a longer period of time rather than trusting your instincts and playing by market sentiments.