The article touches upon the issue of Risk In Investing In Stock Market. Investing in stocks is a risky business. There are certain risks which can be guarded off and controlled to a certain limit. However, there are certain risks which cannot be controlled as they are inherent to investing.
It is the traits of the successful investors which help them sail through the storm caused by market and economic shifts due to risks. Based on which the investors are required to adjust the investment portfolios. The investor must follow the general rule which states, smart investing includes risk management.
Based on assurance of the return, there are two types of investments, namely, riskless and risky. Riskless investments are guaranteed, however the value of the guarantee is only as good as the guarantor, only the ones which are supported by the full faith and confidence of a large stable government are considered riskless.
For any stock, mutual fund or any other investment, economic or country risk tends to be the basic risk that prevails, that the economy can go wrong. It is more political in nature. Investors always consider investing in a more stable and growing economy.
Another risk which is associated with investments is related to the prospect of uncertainty in the returns once the foreign gains are converted back to the original currency, this is known as currency risk. Country and currency risks add to form another type of investment risk known as the exchange rate risk.
Business risk refers to the potential loss of value through competition, mismanagement and financial insolvency. The best alternative available to companies against this is the presence of franchise value. With the help of which the companies are able to raise price on the basis of increased labor, taxes or material costs.
Investments products tend to look attractive due to the tax benefits they provide. Dividends from stocks and mutual funds are tax free in the hands of the investors therefore they are investor friendly. However, it is on the discretion of the government to change the regulations, which is why this type of risk is known as regulation risk.
Liquidity of an asset is associated with selling and realizing cash value with the least possible loss in terms of time and money. Treasury bill have are less liquid as compaired to small cap stock listed on regional stock exchange which may have significant liquidity risk attached to them.
Inflation wipes out value and creates recessions because of which it is regarded as a tax. Inflation risk is related with the chance that the purchasing power of invested money may decline. That is why it is also known as purchasing power risk. The best protection against inflation is stocks as the companies have the ability to adjust their prices on the basis of rate of inflation.
The most familiar form of risk is the market risk which is associated with what happens when the market turns against or ignores investment. It is regarded as an opportunity to pick great stocks when the market is not bidding the price.