Like every other endeavour in life, stock market investment also comes with its fair share of risks. But it is also the smartest way to generate wealth from the available resources. Better risk management in the stock market leads to better returns for the investor. An investor can lower the risk of his investments and have a profitable stint in the stock market by applying a strategic investment plan and making data-driven decisions. An investor can find out the Demat account meaning and understand the various risks associated with the stock market to overcome them and increase his returns.
Risks Present in the Stock Market
Stock market investments carry more risk than other safer investment options like fixed deposits. However, the returns from stock market investments have consistently outperformed conventionally safer financial instruments. Understand the various risks associated with stock market investment to manage them better.
- Market risk: The demand and supply of a stock decide the price of a stock. An investor buys a stock at the market price and sells it depending on his investment horizon. If the price of the stock is lower than the purchase price of the stock when the investor wants to sell it, he would book losses on the trade. It is known as market risk.
- Company risk: A share is nothing but a part of the ownership of a company. If the company does not perform well and faces problems, the price of its stock will fall subsequently. It can lead to losses for the investors.
- Liquidity risk: Stocks that pay dividends to the stockholders are a regular source of income. A company facing financial troubles may cut down on the dividends it pays to the shareholders, leading to losses for the investors. Investors can open Demat accounts online to invest in dividend stocks.
- Taxability risk: The tax rules that govern the various sectors in the country keep changing from time to time. If an investor has invested in stocks of a company whose taxation policies have been adversely affected by such a change, he will have to face a fall in the stock price of the company.
- Regulatory risk: Several business sectors like tobacco, alcohol, telecommunications, food & beverages, are regulated by governing authorities. A regulatory change in an industry can lead to a price drop in the goods and services of a company in that sector, leading to a price drop in its share prices.
- Inflation: When there is an increase in inflation, companies need to pay more to procure raw materials and utilities to manufacture and supply their goods and services. It negatively affects the profitability of the company, leading to a price drop in its share value.
How to Manage Stock Market Risks for Better Opportunities
Risks and rewards go hand in hand. Follow these tips to manage the stock market risks to get better earning opportunities in the stock market.
- Diversification: Diversify your investment portfolio to include stocks of companies that are from unrelated industries. This way, if there is a move in one of the industries, the other stocks remain unaffected, balancing out the risk on investment.
- Research: Do adequate research about a company before investing in its stocks. Do not invest in a company out of hearsay. Study its financials and future projections before investing in its stocks.
- Avoid emotional investment decisions: The price of a stock may rise or fall several times during a trading day. Do not get overconfident when the stock price shoots up, and do not panic when the stock price drops.
By implementing the right investment strategies and making well-researched decisions in the stock market, an investor can turn his risks into opportunities.
