In stock market investment, we not only have to multiply our money but we also have to fight the risks in the stock market. These risks are caused by sudden events and these risks can come once in 10 years, once in 5 years or suddenly at any time.
Systemic Risk
In today’s article, we will describe some incidents that happened in the past or at present.so that investors can get an idea of such incidents and they can manage such risks for themselve
This type of risk affects the entire market. For example, economic recession, political disputes between countries, financial crisis, the biggest example of this is Covid-19, which caused the markets across the world to fall by 40% to 50%.
Interest Rate Risk
Interest Rate Risk: Changes in interest rates affect bond prices. Rising interest rates reduce the value of bonds, which in turn impacts fixed income portfolios. Also, rising interest rates are not good for the equity market.
We know that companies need capital to run. If the interest rate increases, the ROI of companies will decrease because they have to return more interest and this affects their profit.
Most of us would remember that when we were going through Covid-19, at that time governments suddenly started reducing rate cuts to avoid a possible economic recession, after which we saw that along with the US stock market, the Indian stock market also started moving towards heights.
Currency and Commodity Risk
The rates of currencies around the world, whether it is dollar or any other, always keep fluctuating and this keeps affecting the stock market.
We know that we import a lot of crude oil from abroad. In such a situation, if the dollar becomes expensive, then we or the companies will have to pay more money to buy it.
Some Indian companies like BPCL, HPCL or IOC have to buy crude oil at very high prices, due to which their input cost increases and their profit gets affected, due to which their share prices fall.
Liquidity Risk
Liquidity acts as fuel for the equity market because ultimately people will invest in the stock market only if they have money. If there is more liquidity in the market than required, then the market will perform well despite weak fundamentals.
Despite this, if there is lack of liquidity in the market then it becomes very difficult for the market to move forward.
For example, you might have noticed that during Covid-19, when the US government started printing a lot of dollars, the liquidity in the market increased a lot and the stock market kept hitting all-time highs.
Political and Regulatory Risk
If there is a political dispute between two countries and a situation like war arises between them, then due to this the stock market may fall, although later the market does not pay much attention to these news.
For example, in the beginning, when the war between Russia and Ukraine was going on, a decline was recorded in the market, but the war is still going on today, the market has ignored this news and does not pay much attention to it.
Apart from this, regulatory decisions also affect the stock prices. For example, in recent times, GST was increased on the gaming industry, the business of the gaming industry was greatly affected and their stock fell.
Credit Risk
The stock market crisis of 2008 was due to credit risk. You must have heard about these two US home mortgage companies, Fannie Mae and Freddie Mac.
Both US companies bankrupted as a large number of us owners defaulted on their credit, leading to a spiral of defaults around the world and a massive economic crisis that led to a collapse in markets around the world
Informational Risk
In today’s time, you people are given a lot of wrong information about stocks, be it through YouTube channel or through WhatsApp, due to which you invest in the wrong stock and you have to face its consequences.
Here we have understood what risks we can face during investment. In the next part of the article, we will learn about portfolio management so that we can avoid the risks in our investment.
Portfolio Management
Portfolio management is the first step towards making money. If we learn portfolio management then understand that we have done 50% of the work. The following are important aspects of good portfolio
Derversification
Don’t invest all your money in one sector (e.g., technology or banking). Invest in different sectors like healthcare, FMCG, automobile, and energy. Reason: A slowdown in one sector will not impact the entire portfolio.
Asset Allocation
An investor can invest following assets
Stocks
Mutual Funds
Bonds
Derivatives
Commodities
Real estate
FD
PPF
Crypto
Risk Tolerance
You should invest according to your risk taking capacity. For example, at a young age, we should invest more in equities because we have our whole life to make money. Now, if we have made enough money in equities, then after the age of 60, we should invest more in bonds.or we can shift our investment to less risky products.
But the ability to take risk also depends on the investor’s intelligence. For example, during Covid-19, people got into panic and started selling their properties, but at the same time, the smart investors started investing in property.
Investing Timeline
Timeline is very important in investing. If you are going to need the money after 18 to 20 years, then you should invest in equity. If you are going to need the money within one or two years, then you should invest that money in Bond or FD.
Rebalancing
For rebalancing it is necessary that your investment should be in a certain amount in equity, gold and bond market.
Because if needed, let’s assume that we have got very good returns on gold and the equity market has become very cheap in the present time, then we can buy equity shares by selling gold .
If during our investment journey we find out that gold is very cheap at present and we should invest in it, then we can sell our bonds and invest in equity.
In this way we can balance our portfolio from time to time and get good returns
Active Versus Passive Management
In active management, the investor keeps doing various types of research from time to time and invests in different types of stocks and sometimes he keeps balancing his portfolio between equity, gold or bonds.
While in passive management, the investor does not want to take much hassle and he invests in very good stocks like Reliance HDFC etc. more than that he invests in index funds or ETFs which are considered to be very safe and secure investments.
Tax Factor
What we need to know is that if we invest in any instrument, then how much tax do we have to pay on the profit received. Many investors invest on this basis so that a lot of tax can be saved.
We need to know that we have to pay long term capital gain or short term capital gain tax on the returns of stock market investment. Apart from this, we also have to pay tax on the returns of mutual funds.
ULIP plans are tax exempted. And became an attractive option to invest in
Therefore, an investor should be aware of the tax applicable on the profit earned on his investment
Conclusion
We hope that the components discussed in this article will help you in creating a good portfolio but for all this, it is very important to have information and education so that you can understand all these components
You should always stay updated about the companies in which you have invested
We have tried to cover as many components as possible in this article, hope you liked this information