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| Risk Associated with stock market investment |
We often hear that stock market investments are subject to risk. What is this investment risk? When we talk about investment particularly in the stock market we often talk about the return. We talk about the return on a particular time frame. When a market expert suggests any stock we often hear about the returns expectation from that stock in one or two years time. There is a saying that higher the risk the higher the return.
It is up to the investor's risk appetite, how much risk he/she can take. The market experts suggest stock on various portals, business channel and social media. Just imagine how easy it would be then to asses a stock if they also suggest the risk involved in earning such return. For example, if an expert suggests a stock of 20 percent return in one year with a risk of 5 percent and another stock of 50 percent return with a risk of 100 percent of your capital in one year. However, within the risk parameter, you would prefer a stock that risk 5 percent of your capital to one that risks 100 percent of it.
It is also true that you cannot make a significant amount of money if you avoid taking the investment risk. You need to understand that risk is also an opportunity, but it should be calculated risk. If the fear of losing makes you leave the money idle or put in low return instrument, then inflation will devalue it. Hence, investment is a must and the investment risks associated with it must be understood clearly.
Normally an investor calculates risk relating to economy and company performance to achieve their targets or returns. There are several parameters that evaluate the risk factor. One can use statistical and analytical tools but they are not affordable for the small investors. Small investors have no knowledge or have no time to use the tools. We have made a list of parameters to calculate risks. By using these parameters investors can avoid the unwanted risk and minimize the risk of their investment.
Types of Investment Risk Associated with Stock Market
Time Risk Factor
The risk is directly related to time. The first question we need to ask ourselves is “ how long we can invest the money” or “when do we need the money back”. If we can invest the fund for the longer time frame then we can take more risk. The logic behind this is if there is a loss after investing in particular stock in the near term it can recover it if there is more time. So the time frame of investment is important for taking a risk in stock market investment.
Economic Risk Factor
Economic performance of a country plays an important role to grow your investments. If a country is not growing and its GDP growth is negative then definitely the stock market will not give a positive return. Several times we have noticed that if GDP rates increase, inflation rate comes down, RBI cuts interest rate then stock market rally starts. Also, we can’t ignore FIIs contribution to growing our stock market. FIIs starts investing in the market when the economy is growing and vice versa. So the macro and micro-economic factors play a positive and negative impact in the stock market. You need to understand the basic investment risk of economic factors, you can update the economic development from the news channel or the internet.
Global Risk
International developments like Crude Price, WTO, insurgency, and war between the two countries also impact risk. Recent Indo-Pak cross border tension has affected investors portfolio for a few days. We cannot forget the tension created by Kim Jong of North Korea in 2018 and how it impacts on the global market. The Trade war between the US-China also made our stock market volatility in the recent past.
Industry level Risk Factor
You need to understand the state of the industry before doing any investment, whether the specific industry is growing, maturity or decline phase. An industry like IT, Banking and Financial Services are in growth phase whereas Telecom, Aviation are not. While studying Industry level investment risk understanding of Industry cycle is also important. For example, while monsoon there is less demand in cement compared to the rest of the year. Structure changes and paradigm shifts in an industry should be observed for example people current preference for motorcycle compared to scooter or CRT Television versus LED television. So you need to calculate this kind of industry level risk before investing any stock.
Company level Risk Factor
The company news is always available on the internet and various business channel. The company management, financials parameters like EPS, Sales, EBITA, etc can give you a fair idea whether to invest in the company or not. The quality of management and financial parameters are equally important to decide risk associated with the company. If the Company is listed in Z group or T group then it is a clear indication that the company is not fulfilling the list requirements or there is unusual activity in the market in relation to the share and stock exchange has put it under special surveillance.
Regulatory Risk Factor
Market manipulations and scams will be there in the market as long as there is human greed. Timely prevention, early detection by the strong regulatory and legal entity are required to prevent them.In the NSEL case and strong action taken by the SEBI and EOW has banned many commodity brokers recently. An investor needs to understand this risk before investment.
Technology Risk Factor
In the last two decades, the medium of stock market trading has been changed in India. Investors used to go to sub-brokers office or trading used to be done through telephonically but nowadays investors are trading online even on the automated trading platform. The system risk has increased nowadays with the introduction of Online trading and Algo Trading system. You should choose the trading platform after a thorough understanding of the risk associated with it.
Conclusion
As an investor, you should read the Risk Disclosure Documents that are available with brokers to understand such risks. Successful investing would require you to study the above types of investment risks and avoid greed for more profits or fear of incurring losses. You have to be rational rather emotional while investing in the stock market.
In short, let us remember that no-risk no return or no pain no gain. You need to take small steps, ask for advice from the market experts, read books, use the internet. But don’t give up investing because there is a risk associated with the stock market investment. Don’t give up investing in the stock market because your colleague, or your brother or your neighbor made losses in the stock market investment.
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Happy Investing!
Finogyan Team
