When it comes to investing in the stock market, people usually ask, “What are the most risk-free investments that guarantee good returns?” Well, there is nothing wrong with looking for safe investment opportunities, but there are actually specific types of risks when investing. Warren Buffett said, “The risk comes from not knowing what you are doing.”
What is risk and what types are there
Risk can be defined as the possibility of losing part or all of the principal. Uncertainty about the return is also a risk. So, let’s look at the different types of risks.
One of the most common investment risks is a deteriorating economy. After the market crash in 2000 and terrorist attacks in 2001, the economy entered a deep recession. A number of factors have led to a significant decline in market indices. The market returned to pre-9/11 levels many years later, but the economy collapsed again in 2008-09.
Inflation destroys value and causes recessions. While we usually think inflation is under our control, dealing with higher interest rates could at some point become an equally serious problem. With huge government loans to finance stimulus packages, inflation is only a matter of time before inflation returns. During such periods, investors return to hard assets such as real estate and precious metals, especially gold.
Volatility is the amount or range in which a stock moves. For example, larger companies that are priced at $ 200-600 a share can move up or down $ 6-9 a day. This creates a buzz. For stocks that are only $ 10 per share, they can move up or down by a maximum of $ 1 per day. It doesn’t scare people and they feel safe. It is less volatile. Think of volatility as a range, not a direction. The amount of movement is implied (up or down).
There is no overnight risk for day traders who hold stocks from the morning until the open until the close of the open. But, if you are a long-term investor, holder or swing trader, there may be an overnight risk if you hold a position overnight or for many days. You have no idea what will happen overseas, etc. For example, a company that sells automotive products may have an engine explosion in the United States, which will lead to a drop in shares the other day (your shares will change in the blink of an eye).
Liquidity problems usually arise when you trade penny stocks. But if you are currently trading stocks that are actively trading with very liquid companies like Netflix, Apple, etc., then you should be fine. This is the reason why large institutions avoid trading low dollar stocks. They need liquidity – they need to get in and out of companies very quickly. If you find it difficult to exit the company quickly when needed, the stock is illiquid, which complicates the task. You may be forced to hold onto a position where failure awaits you.
Margin risk arises when borrowing money – if you borrow money on margin. When you trade and open a regulatory account and use free funds, this is good. But borrowing funds from a brokerage house and not paying back the money for a certain period of time leads to margin risk.
Market risk describes what can happen to the market. Examples include incidents or events that could affect the global economy, your current country, etc.
Trading risk is what you trade. For example, if you are putting $ 1000 into a trade, that is your trading risk.
Market value risk
The token value risk indicates a situation where the market turns against your investment. This happens when the market goes in pursuit of the “next hot thing” and leaves a lot of good but uninteresting companies behind. This also happens when the market crashes – good and bad stocks suffer when investors leave the market.
The time between when you see your price and when the trade actually enters the market.
Business risk and technology risk
A few years ago, typewriters and pagers were of great importance, but today they are not. It’s the same with floppy disks and audiotapes – what would happen to these companies.
Government risk, political risk or regulatory risk
Suppose you have invested in a specific sector and the government has developed an unfavorable policy, what happens in such an environment? This risk is clearly visible in the oil and gas or sugar sector.
Now that you know the most common market risks, trade accordingly. You cannot rule out all the risks, but by being careful you can avoid some of them.