Types Of Risk In The Stock Market: As we see in previous blog Stock Market is not easy as you think. It gives you a big profit as well as losses also so While investing in stock market for wealth creation comes with inherent risks. as a investor we should be aware of it. Here are the some risk involved.
What is investment risk
investment risk is the risk which measures the uncertainty of the returns according to the expectation of the investors.in investment risk has positively relation with returns the higher risk the higher returns.
Example: Investing in PPF IS safer than investing stock market. But one should also know that PPF gives us only 7% /P.A. return. Whereas the stock market give us a 15 % P.A. return approximately. Having understood about investment risk let us discuss the Types of risks.
Credit Risk
when the government of any company which issues bonds start facing financial difficulties and are not able to pay principle or interest then it is known as credit risk. this kind of credit risk is mainly applicable to debt instrument like debenture, bonds, or mortgages we can also evaluate this kind of risk show analysing the credit score given by the credit company.
Liquidity Risk
When we unable to sell investment at the current market price of that investment tool that is known as liquidity risk. when we sell our investment at a lower price than the fair price then the this kind of risk arises. usually when we invest in real estate then this kind of risk mainly arises and we have to sell it at a lesser price.
Market Risk
When our investments decline its value due to some event it affects the whole financial market then it is known as the market risk the market risk can be equity risk, Currency Risk, or Interest Rate. These factors can include economic downturns, political instability, changes in investor sentiment, and global events. For example, during the COVID-19 pandemic in early 2020, stock markets worldwide experienced sharp declines due to uncertainty and fear
Concentration Risk
This types of risks arises when we concentrate our money only in single type of investment, diversifying a money into different investment tools helps us in reducing risk.
Reinvestment Risk
When we reinvest our money at a lower interest rate then it is known as reinvestment risk suppose we invest in a bond at 6 % and after the maturity we decide to reinvest that maturity bond. But we then reinvest it at 3% that is reinvesting at lower risk then reinvestment risk arises.
Inflation Risk
Inflation mainly decrease of a purchasing power over the time. When our investment return are not able to gives the increasing rate of inflation then it is known as inflation risk. . Unexpectedly high inflation can lead to tighter monetary policy (higher interest rates), further impacting stock markets.
Regulatory Risk
Regulatory risk involves changes in laws and regulation can impact on that specific sector of the entire market as well as that could potentially cause losses to a business. It arise from laws and regulation that rely on penalties or sanction to regulate the operation of a business.
Volatility Risk
We usually say that todays market is volatile or there is a volatility in todays market. what does it mean? When market shows big moves and that moves should be positive or can be a negative also then it is called volatility. while trading due to highly volatile market we get panic and sell our position in volatile market and we face a big losses. So if you are a beginner then avoid trading in volatile market. If you are a investor then it may not affect you that much. Usually on expiry day or some event like budget , election results markets are highly volatile then such a kind of risk arises.
Other Risk In Stock Market
Improper Advice
In stock market always trust on your study, work on your discipline stock market is not a gamble so do not invest on tip basis. Its total depend on TechnoFunda (Technical & Fundamental) analysis or market psychology.
Timing Risk
We buy or sell at the wrong time when market goes high then, remember that market corrections are normal part of economic cycle. That is why we face a huge losses and it arises a timing risk.
Conclusion
It’s crucial for investors to understand these risks, assess their own risk tolerance, and implement risk management strategies such as diversification and long-term investing to mitigate potential losses in the stock market, try to avoid these kind of risk and grow your wealth.
