Stock market and its risks

                Investing in stock market is not an easy way as it has its own risks. There are many risks associated with stock markets. Risks can be reduced but it cannot be eliminated. Some of the market rate risks are discussed below with its examples,

Systematic Risks

                Systematic risks can be also known as economic risks,

It involves change in interest rates, political parties, recession are some of them which affects a portfolio.

Interest rate risks are mainly due to inflation. This plays a key factor in either increasing or decreasing the interest rates. If inflation goes up the government needs to take measures to bring down the inflation and ultimately the CRR, SLR and the bank rates are increased.

Cash Reserve Ratio (CRR)

             CRR refers to cash that all banks are required to maintain with RBI a certain percentage of their demand and time liabilities (DTL). An increase in CRR will ultimately result in increased payment of DTL and there by decreasing the lending capacity of banks and the reverse happens if CRR is decreased.

Statutory Liquidity Ratio (SLR)

             SLR refers to supplementary liquid reserve requirements of banks, in addition to CLR. SLR is maintained by all banks in the form of cash in hand. The effect of increase in SLR will affect the lending capacity of banks and vice versa happens if SLR is reduced.

Political risks occur majorly because of change in central governments and sometimes state government changes also affect the markets to a certain extent.

Due to change in interest rates the bank stocks gets heavily affected and the risk gets increased in others too.

For example,

Some parties may allow huge foreign investors to do business in India but if suppose the government changes the foreign investors and the business gets affected and subsequently there will be huge risk in the market. It may lead to FII’s pulling huge amount of money out from the market.

Correlation Risks

 Correlation risk is the risk that two assets may go up or down in value as predicted.

For example,

If an investor investing in oil companies and if the oil prices rise or fall there will a subsequent change in the oil company shares and the risk associated with it also increases.

Sector risks

 Sector risks refers to if an investor is building portfolio on only one sector and if the sector gets affected the investor looses his money to a great deal. High risk is associated with this type of investors.

Global market risks

             Global market risk is that if one major market gets badly affected then subsequently it affects the entire global markets. There will be a heavy impact on other markets.

For example,

During the 2008 recession in USA there is a huge impact in all the global markets. Subsequently the Euro gets affected and only the markets having stronger fundamentals will not have a huge impact due to global problems but still it happens adversely.

Managing risk

             Risk can be reduced mainly by having a well diversified portfolio. Investors can hold stocks for a longer period of time but it reduces the financial goals for the time. Also investors can average their looses to a certain extent. Investors can be conservative at times but he shouldn’t be too conservative about it.

A good investor reads the market carefully manages his risks and attains financial goals constantly.

Hope to see yu again

Mugund