Many individuals avoid investing in the stock market as investments in equity is a risky proposition. We so often hear risk and return are said to be inversely related.
As an investor you should have a diversified portfolio, allocation depending on the age and income.
Stock market investing can be risky, but you can avoid the same by understanding the various risk involved and mitigating the same by diversifying your stocks in different sectors. So that performance of your portfolio is not hampered by any strong current in the single sector.
Here are 5 major risk involved in stock market investing
1) Rating risk
Many experts do the analysis on the company stock and performance and give their respective rating based on the analysis. This will have a direct impact on the stock movement. Rating can be either negative or positive, it can often swing the shares to some extent.
2) Emotional risk
Investors while investing tend to make mistakes by making decision emotionally. Most of the time greed or fear to make money in the short time period will negatively affect the investment.
3) Financial risk
There are chances that you can loose your invested money if the company is not performing well financially with each passing year.
Also company's equity-debt ratio plays a vital role if the company is highly leveraged than there are chances of not meeting liabilities and can go bankrupt.
Before investing, one should carefully go through the financials of the company and its previous performance.
4) Inflation Risk
If the performance and return on the company are less than the inflation rate, means you are making losses.
Say for example, if your return on investment is providing you with 10 per cent per annum and the inflation is 12 per cent per annum, then you are making losses as your investment is giving negative returns.
5) Political risk
When in a country government changes, there are chances that the market mood may change depending on the new govt whether it will be industry friendly or not.
6) Economy risk
The country's economy plays a vital role in the performance of financial instruments. The economic risk includes growth of the country, inflation, interest rates, the balance of payment etc.