There are different kinds of risks associated with all kinds of investments, while some are high-risk others are low-risk. Like every other investment vehicle, there are risks associated with the stock market and they range from liquidity risk to currency risk, policy risk, corporate mismanagement, interest rate risk, global risk, and market risk. There are causative factors that determine how risky the market could get. These causative factors include:
Volatility: The stock market can be at risk when high volatility rocks the market like in current times. Stock prices are unpredictable and unstable, any slight drift in the market can affect stock prices.
Interest rate: Just like stock prices, interest rates are also unstable. This instability can lead to shifts in interest rates movement can have an impact on price movements as well.
Business decline: From time to time, many businesses suffer a rough economic and financial decline that could affect their profits or lead to bankruptcy. Once a listed company is no longer performing as it ought there is no doubt that its stock would also suffer. Business declines can be caused by mismanagement or making corporate decisions that are not in the best interest of the company or its shareholders like buying an over-valued asset.
Global market: there is a great tendency for other stock markets to get influenced by the global market. Such that the performance in major markets like the US or China would have an impact on interconnected minor markets. This is why it is almost common to suspect a global recession when major economies like the US, the UK, China, etc., are facing threats of economic decline or recession.
There are a variety of possible risks that investors can encounter in the stock market, with the most common being volatility and liquidity. It is almost impossible to completely avoid these risks, however, a good strategy can help an investor lower risk the chances of risks. Here are a few tips that could help lower risk chances while investing in the stock market:
Determine what type of investor you are: Some investors are high-risk tolerant they can withstand almost any kind of stock market pressure even in volatile times. While others are low-risk tolerant investors who are more likely to panic at the slightest market volatility or plunge. Identifying which you are would help you know which type of risk is worth taking and which is not.
Define your investments: After determining what type of investor you are; the next step would be to define your investments. That way you can know exactly how much you are willing to allocate to a particular investment per time and how much you can afford to lose. In addition to other investment objectives that you may have. This would help you manage your investments and to a large extent determine the intensity of the risks that may likely occur. You must be able to take responsibility for your investment decisions.
Diversify your portfolio: This is a good investment strategy. By diversifying your portfolio stock losses in a particular company can be offset by the gains in other companies’ stocks or other financial instruments. That way the investor wouldn’t feel the full impact of a loss.