Investment School: What are the risks involved in stock investing?

What are the risks involved in stock investing?

Everyone wanted to make quick money out of stock markets and very badly wanted good stock picks that would generate triple digit returns but WAIT,

1. Are you aware of risks involved in stock market investing?
2. Have you calculated the amount of risk that you can take?
3. Are u choosing the stocks that matches your scale of risk?

One should find answers to the above questions, before placing a buy order with his/her broker.Let us go through the various risks associated with stock market investing.

Financial Risk

The investor can lose his/her money when the financials of the company in which he has invested is not performing well. If an investor invests in a company and if the company's profit keep declining yoy, then investor is holding the risk of losing her money because the company's share price will keep moving downwards.

So before choosing a company to invest, do a thorough analysis of the financials of the company.

Interest Rate Risk

Lets assume an investors goes for fixed depost at the rate of 8%. When the interest rate scenario changes, the interest rate in the market can move to say 10%, then you stand to lose the extra 2% gained in new fresh deposits.

Interest rate also affects equity investment,how? . Companies borrow funds from banks, financial institutions for capital expansion. When the lending rate increases, companies bottom line(profit) is hit and hence it affects the share price of the company.

Market Risk

The investment can be influenced by market volatitlity in the short to medium term.The markets sentiment is driven by lots of factors - like global cues,economic data etc. When the entire market is moving down, your stock will also most likely move down and affect your return on investment.

Inflation Risk

In terms of investment, one should always look for inflation adjusted return for true evaluation. If your investment fetches you 10% per annum and the inflation is 12% per annum, then you are losing your money and your investment is giving negative returns.So inflation has a bigger impact in investments.

Poitical Risk

The market mood is influenced by the political climate in the country. When a govt changes,the market will be in a jittery mood to know if the new govt will be industry friendly or not.The major economic policy of a country is framed by the ruling government and hence it has a bigger say in market and hence your investments.

Emotional Risk

Investors usually get into the trap of three emotions while investing. Greed,Fear,Love.They have a greed to make most of the money in a short period of time. They fear to enter markets when market is in a deep bear run. They keep investing in a stock though it is moving down just because they have a mad love for that stock.

In investment, emotions should not rule over intelligence.

So, take into account all these risks before investing in stock markets.

Learn More : How to select a stock?

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