Investment-related risks are the biggest fear for all stock market players. All market participants face the possibility of losing all their wealth, time and energy, etc. Intimidated by the stock market volatility and the unpredictable market movement some people even avoid investing altogether. Although it is possible to withstand a bear market scenario, awareness of the different risk factors while investing in the markets is quintessential.
A publication on The Balance says that some inherent risks actually improve investment decisions and keep the portfolio balanced. However, there are other potential setbacks that are beyond the investors’ control. So investors should at least have a fair knowledge about some of them.
These risks generally are in response to other factors, but investors need to be alert and adjust their portfolios to prevent any further damage. Here are some actual risks involved while investing:
Business risk is faced by a company internally and externally. When investing in a specific company of a specific sector, one looks at their financials for clarity about the future of that investment. To analyze the business risks, you can study the performance of a company or other contributing factors in terms of operations, year-on-year growth, governance, etc. In short, business risk comes into play when you make a wrong stock selection.
In addition to this, the level of competition a company faces in the industry, consumer preference, and any other metric that can negatively impact a company’s profit can be a business risk. Every company faces some level of business risk by default.
The economy of every country, whether developing or developed, has a certain pace at which their economy grows. Moreover, economies can face different macroeconomic factors like new government policies, fluctuations in exchange rates, etc. Economic risk is the risk associated with an investment in a foreign country.
This is another risk that is beyond investors’ control. For example, the COVID-19 pandemic shook the economy of various countries over the world.
The economy can go through phases of slow growth due to economic risks. However, it may recover within a few quarters. There are certain measures and investment strategies that investors can follow to avoid such risks. However, having said that there is no way one can predict it or totally avoid these risks from affecting their portfolios.
Inflationary Risk and Interest Rate Risk
Inflation in the economy results drives up the price of production and raw materials of goods. Inflationary risk simply means that the cash from an investment won’t be worth as much in the future.
The Street says that inflationary risks are not the primary concern of investors because companies can adjust their prices with the rate of inflation. Inflationary risks can affect FMCG companies to a certain extent.
This risk is concerned more with bond investors or other cash-heavy investments. According to Investopedia, interest rate risk can sometimes operate along with inflationary risk. It refers to the problems caused by the rising interest rate. Companies or businesses that need financing can have an adverse impact on it.
Market risk, also known as ‘systematic risk’ is the chance of experiencing a loss on account of poor performance of the broader markets. In other words, it is the effect on your investments because of the price fluctuations in the market.
Portfolio diversification cannot completely mitigate market risk. Market risk is an umbrella term and includes different types of risks such as equity risks, currency risk and interest rate risk.
We call a drop in share price leading to a loss as equity risk, while currency risk is related to foreign investments that occur when there is a change in the value of a certain currency.
It is true that the stock market is a risky place and not only from the perspective of an investor; businesses also face similar risks. After going through these risks, you may feel that being investing conservatively is the best option. But, taking calculated risks can help you earn better returns and achieve your financial goals.
If you consider investing with a long-term view in your mind, you earn decent returns. Creating a diverse portfolio is one of the best ways to minimize risk. We can also do this diversification on the basis of your age; young investors can handle riskier investments while people close to their retirement can invest in less risky investment vehicles.