We so often hear about investments in equity being a risky proposition. Before investing in any of the product one should have enough knowledge on the financial instrument. Investing in equity comes with risks.
Have you ever wondered what these risks are? And what are the factors affecting your investment decision in the instrument?
Risk is nothing but the deviation from expected returns. Higher the risk, higher the returns and vis-versa. So, risk and return are said to be inversely related. Like wise investing in equities comes with the higher risk while investing in bonds are considered to low risky and expected return are also less.
Your portfolio should be built on risk taking capacity as well as the investment risk. There are several parameters one should consider before investing.
Here are different types of risk associated with investment, which you need to be carefully throughout your investment.
The country's economy plays a vital role in performance of financial instruments. The economic risk includes growth of the country, inflation, interest rates, balance of payment etc. Any hindrance in any of the sector will directly impact the financial status of the country. This will have direct impact on the company performance, indirectly hitting your shares and your money. So, one has to keep eye on the economy and developments.
Exchange Rate Risk
Most of the companies revenue is dependent from outside country especially software and import-export companies who are mainly dependent on the exchange rate. Any fluctuations in currency will direct impact the company profit and shares.
So, people with such exposure can enter into futures and option where they can minimize their losses by hedging.
It is also very important that how the company manages its finances. The company's equity-debt ratio. How the company prefers to borrow money?. If the company is highly leveraged than there are chances of not meeting liabilities and can go bankrupt.
Before investing any shares, do look at all the possible ratios which could impact your investment.
Industry level Risk
All industries face cyclical growth. So, one should examine the previous performance of the industry to know whether the company is in growth phase of decline phase and invest accordingly. Any new industry specific news will also hamper the stocks of the company.
Apart from these there are other risks like management risk, business risk, interest rate risk.
Most of the investment risk can be reduced by being update and the best way is diversifying your stocks into different sectors.