Stock market providing your chance to win big, but this road would have points of danger, that must be known. Here are some of the major risks associated with stock market investing:Here are some of the major risks associated with stock market investing:
Market Risk: Market risk, or systematic risk, is defined as the possibility of loss arising from the factors which are not limited only to the performance of the stock market, rather, it could be a system-wide (e.g., change in fiscal policies, public mood change, etc.) factor. These include factors like recessions, international political happenings, interest rates adjustments, and community moods. Market risk exist universally to all stocks therefore against the presumption that diversification will neutralize risk.
Company-Specific Risk: The company specific risk, also call unsystematic risk, generates from the factors, which are relate merely to one company. Therefore, situations involving bad management, dwindling sales, product recalls, legal problems and competition are the possible reasons for the firm’s woes. The inclusion of companies or industries having low correlations with each other can minimize the impact of company risk or single major industries/sectors risk.
Volatility Risk: Thus, volatility risk is a risk inherent in single stocks or in the whole market, which explosion of prices is able to hit. High volatility results to fairly sudden shifts in stock prices so it gets difficult for a potential investor to predict the prices not in the future but also increases the chances of investment losses.
Liquidity Risk: Liquidity Risk is the lack of flexibility to transact at a reasonable price when we want to buy or sell an asset. Under liquidity risk, stocks declination can be heightened by stock with low trading volumes or not many people trading in those markets, particularly when the market is under stress or when there is uncertainties.
Currency Risk: The investors that need to trade stocks in a foreign market or have world stock assets have currency risk that occurs from the shifts in the exchange rate. Exchange rate volatility can affect the returns earned on investment funds when you exchange the new currency in your home currencies.
Interest Rate Risk: The interest rate risk focuses respectively on the effects of the variation in interest rates regarding market prices of stocks. The situation of growing interest rates might result in companies’ costs of borrowing increase, adversely affecting their profits and share prices most probably decline.
Regulatory and Political Risk: And new governance systems and political turmoils have very bad influence on stock prices and investors’ opinion. The enactment of a new law, modification of trade agreements, or a regulation that contradicts a particular industry creates an unsafe and “un-sticking” atmosphere.
Addressing these risks necessitates comprehensive risk management systems including diversification, due diligence, keeping yourself up-to date with market trends and developments, as well as retaining a long-term investment ethos. The stock market offers many chances for investors to build wealth but it would be naïve to ignore the chances of losing money along the road of their investment journey and they ought to know that every investment is a trade-off between profits and risks.