Risks Involved in Direct Stock Investing
When we talk about the stock market either it is mutual funds or direct stock investing, there are some risks involved with it. Strategic planning for investments and historic data driven decisions will definitely benefit investors to think of a decent return in long term investing. We already discussed about the Risk involved in Mutual funds previously. Now we are going discuss about the Risk Involved in Direct Stock Market Investing. All the investors are expecting a good number of returns from their investing strategies and there is no doubt that Stock Market is one of the best tools to achieve the same. Due to its popularity, investors are always ready to take the associated risk according to their appetite.
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Here according to appetite means that every investor will have different investment strategies to make money according to the loss they can bear, if happen. It is always said, Stock market works on principle of risk-reward i.e. higher the risk will lead to higher returns or vice versa. Let’s take a look on the risk involved in Direct Stock Investments.
- Market Risk
Fluctuation in the demand and supply of stock in the market will help to determine the price of the particular stock. The fluctuation between the price on which investor purchase it and sale it will communicate us the profit and loss on the invested money. This profit or loss will depend on multiple factors. Due to market prices up and down, investors may have to book losses sometime and it will refer to the market risk.
- Interest Rate Risk
Whenever government makes any changes in the interest rates, this will impact every thing in the market directly or indirectly and it derives the economy of the country. Loans and deposits are two most important aspects of the economy. Let’s understand this with a simple example.
If the interest rate increases, companies listed in the stock market will get the loans on higher interest rates which will impact profit margins, in turn will impact the stock price. If the interest rates decrease, it will indicate the slowness in the economy which will affect the demand in the market and economy, again it impacts the growth of the business.
- Company Risk
It is very obvious to have ups and downs in the business and that could be a possible reason for fall in the stock price of a company in the stock market. Owning shares in the company means that own a part of the company. So, the performance of the stock price will directly affect to the profit and losses to the investors. It is always advised before purchase the stock of a company investors must need to take a look on the financial of the company.
- Liquidity Risk
Increase in the stock price is not the only way to get profits from the stocks. There are lots of good companies which are providing dividends to their investors. Dividends are also considered to be one of the best sources of income. Here is the liquidity of the company plays an important role. If there is any problem in the liquidity with the business then it potentially preventing buying and selling of the stock and may also lead to cut the dividends.
- Taxability Risk
This will again depend on the Government strategies for taxes imposed on the different categories of the business. At intervals, Government will make announcements to change the tax rules which will directly impact the business in the process and profits, and in turn it will impact the sentiment of the market for the particular business sector. Just like Government recently make changes in tax rules for Gaming industries.
- Inflation Risk
Inflation will refer to the changes in the rate of prices. If the price is going up for product and commodities then it says increase in inflation rate or vice versa. Every business will run on the raw materials and if the commodity prices will go up or can say if the inflation rate is increased then it inversely impacts the stock price of the business.
There are various other factors or risks which will have close impact on the businesses and stock prices of the companies such as political risk, social risk, currency risk. We cannot avoid them but definitely we can manage them with the help of some strategies which we will discuss later in a separate article.
