Risks Involved in Buying Shares & Securities that Everyone Should Know

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Synopsis:

The share market is a volatile place and this is what makes stock and securities investment risky. However, if you know the risks of buying shares and securities, effective risk management can mitigate your risks.

The often-heard (or seen) phrase related to the stock market and investing in securities goes something along the lines of a warning. It is a daunting message that may put the bravest investors off. Nonetheless, millions still put their utmost faith in buying shares and securities as a means of investment. While market volatility can, and does, affect stock prices, and securities may tend to fluctuate like the dust in a desert storm, with risk management techniques, you can potentially gain from stock market returns. Buying shares is the easy part of investment, but knowing the risks, and then finding ways to mitigate them, can be challenging, yet helpful. Nonetheless, the first step is to know the risks. 

Article Highlights

The article that follows takes you through the risks involved in buying shares and securities, stressing on:

  • The Concept of Risk

  • Why Knowing About Risk is Important

  • Risks You Should Know About

The Concept of Risk

To be honest, stock market investment may be considered risky, but there are investors of all ages thronging the securities market to buy shares. With risk management techniques in place, the most experienced investors still face risks while investing in shares and securities. Although stock investing may pose some danger (that of losing your money) when you invest, and hence, the risk, it has, from a historical perspective, potentially given more profitable gains than other investment instruments like fixed deposits and bonds. Buying shares is a tempting prospect, even for beginners, so it’s important to know the risks involved in buying them. 

Why Knowing About Risk is Important

The very obvious reason why you should know about the risks involved in buying shares and securities is that you could lose it all in the blink of an eye. The more you invest, the more you could potentially lose if the markets and stocks don’t go in the positive direction you have predicted. Prices in the stock market fluctuate voraciously and this is one of the reasons that investment in the share market is not a preferred choice for many investors. Nonetheless, if you know what the potential risks are, you can easily take effective steps to lessen them and see potentially optimal returns. 

Risks You Should Know About

There are certain types of risk involved in the buying of shares and securities you should be aware of: 

  • Systematic Risk/Market Risk

This is the risk that arises due to the daily fluctuations of stock prices in the market. Fluctuations in the market may be largely based on shifts in prices of the key market indices, the Sensex and the Nifty. This affects the prices of individual stocks, and downward trends are seen if the indices go low. In turn, these indices may fluctuate in their prices due to the larger strength of a country’s economy. 

  • Liquidity Risk

When you buy shares of a company, you may wish to hold on to them for long-term investment. However, if you want to sell them at any time, you may face a liquidity risk when you discover that you cannot sell these shares. Liquidity risk is also indicated when a company is not solvent enough to sustain its business operations and this affects its stocks negatively. 

  • Business Risk

Investment in the share market can be profitable if you do enough research about the company whose stocks you want to invest in. The management and leadership of a company play key roles in its success and profit-making capabilities. If the company is mismanaged, the company may be at business or operational risk and so may its stock. Business risk may be caused by many factors such as strikes by the workforce or changes in the company’s capital structure. 

  • Risk Due to Inflation

As you may well know, many factors affect stock market prices, and these increase or decrease your risk in investment in the share market. Inflation negatively impacts stock prices when an investment loses its value at a time in the future due to inflationary forces. 

  • Risk Due to Currency

Risk management techniques in share market investing often involve factoring in currency fluctuations. Due to fluctuating currency rates in foreign markets, stocks may shift in price too. 

  • Risk Due to Taxation

Tax laws change from time to time, depending on such decisions taken by governments. In case companies are levied fresh taxes or their taxes are increased, the price of the company’s stock may drop. 

  • Interest Rate Risks

The government has the right to change interest rates in the country and this indicates the state of the Indian economy and impacts the financial markets. In case there is a rise in interest rates, companies may stand to get loans at high interest rates and this may eat into their profits. This affects the company's stock price negatively. 

Manage Risk & Manage Your Investment

The management of risk primarily depends on knowing what risks may impact your stock market investments and how negatively and positively this happens. Stock prices are invariably impacted by the economy and even the condition of other economies, and you may want to consider geopolitical events while assessing risks in investment.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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