5 things to know about stock market risks
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Transcript of 5 things to know about stock market risks
Things to know about
stock market risks5
We all wish to get maximum return on our investment. However, there is nothing like a
risk-free investment. There is always a fear of losing money when it comes to investing
in the stock market. It is better you be well aware of risk factors.
Here are 5 things you need to know
Systematic and non-systematic risks: Stock market risks are of two type: Systematic (non-diversifiable) and non-systematic
(diversifiable) risks. Individual companies do not have any control over systematic risks.
Non-systematic risks basically fall in the company or industry-specific risk category.
Non-systematic risks can be tackled by holding a portfolio that contains multiple stocks
from different sectors. This is the reason why market experts include stock specific risks.
#1
Higher debts: Companies often end up with high debts. This may hurt the company’s ability to
generate enough revenue. High interest rates, repayments eat up company’s earnings.
If profits get squeezed, as shareholders, you may see dividend cut or the company
delay expansion plans. If overall demand for the company’s goods or services is strong,
then this can hurt even more.
#2
Floating stock factor:Liquidity factor is basically the free availability of buyers and sellers of a stock in the
market. Investors often prefer to responsibly invest in larger, better known companies.
Liquidity basically plays an important role in picking small and mid caps stock
investments. Due to poor free float, the company’s share price may fluctuate more than
other shares listed.
#3
Business cycle variation: Goods and services firms, real estate developers, automobile companies and commodity
producers are closely related to several stages of an economic cycle. Such stocks
experience several variations that depend on the demand as per market conditions.
When the demand is strong, share prices rally on hope of better revenue and profit
visibility. The reverse is likely to happen in a poor demand scenario.
#4
Poor corporate governance:
There are many companies that attract institutional investor attention due to high
corporate governance standards. This largely pertains to disclosures of good or bad
events in the company that could affect future profits of the company. Large investors
tend to shun businesses that do not make adequate disclosures about factors affecting
the business. Poor corporate governance could hurt the company’s profit performance.
#5
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