Every financial instrument that you put your money in carries a certain amount of risk. Some may have a lower risk, while some may have a higher risk. The rule of thumb is – the higher the risk, the higher the return. However, there are many catches in this rule.
Of all the investment options you will explore (set aside crypto, we are talking about the ones that are regulated), stocks will be at the extreme end of both risks and return. In this article, we will discuss the risk and rewards and ways to reduce your risk.
Below are the four different types of risks associated with equity –
The market risk – There are two ways by which you can make a profit by investing in equity – through dividend and by buying a share at a price X and selling it at a higher price. When you decide to sell the stock, the stock price can be lower than the buy price, and you will have to sell stock at a loss. This is known as market risk.When you invest in companies taking assistance from investment advisory services, you can lower the market risk to some degree.
Company risk – When you invest in equity, you are basically investing in the business. If the business fails or if it performs poorly, then chances are you will be in losses. The best example of company risks is – Yes Bank and DHFL. These were excellent businesses at one point. One led to heavy losses for investors, while in the other, investors lost every single penny they invested. If you don’t want to be in a similar situation, register yourself with the best stock advisory company in India.
Liquidity Risk – The reason you invest in any financial instrument is to get the money back with a higher return when you want to. However, if there are issues with the company, the regulatory body may freeze the trading company’s shares, and you face liquidity risk – you cannot sell your stocks.
Regulatory risk – Many sectors are governed by regulatory bodies. The policies introduced have a direct impact on the business in the sector. If a new policy is against the company you have invested in, you face regulatory risk.
Successful investing is not about avoiding risks but about managing risk.
The rewards of investing in equity
Yes, there is no question people have lost big money when it comes to investing in stocks. However, it is not because the stock market is gambling and people always end up losing in gambling. People lose money because they don’t understand investment and investing and start to invest.
Stocks are the best way to create wealth, and everyone can do it. There are only two rules for success in stock market investing – Invest in good companies and stay invested for the long term.
Many people lose money in equity because they sell the share if it goes down. Hence you must understand your risk profile and invest accordingly. Jarvis, as a company, first understands the risk profile of its customers and according to the risk capacity, creates the customer portfolio.
The other point is to stay invested. If you stay invested in a quality stock for years, you will be amazed to see the results.
Let us understand the risk and rewards together now. You invest Rs 1000 each in two stocks – A and B. Company A business suffers, and the future does not look promising. What is the maximum loss you can have from one company? The maximum loss is Rs 1000. When it comes to gain, what is the maximum gain? On paper, it is unlimited. Many stocks have multiplied investors’ wealth 10X (even 100 times) in a few years. But for this to happen, you have to stay invested.
Now that you understand the risk and rewards, the only thing you need to start doing is to reduce your risks –
Research the company & don’t do emotion-based investing – Never invest in companies based on tips. You should do some level of analysis before investing in a company or take investment advisory services. Also, you should avoid emotion-based investing. During an economic slowdown, panic can lead investors to make rash decisions that can lead to losses or further enhance the risk of the portfolio of stocks.
If you don’t have the time or interest in the research, the best option is to invest through Jarvis. Jarvis takes care of both these points. Jarvis is completely AI-driven, and hence the chances of going wrong reduce significantly. At present, it is one of the best stock advisory companies in India that uses AI.
Diversification -If you don’t understand the market, the biggest challenge for you will be – stock picks. You will either invest in too few or may invest in all the companies that you come across. Diversification is essential, but over-diversification is harmful.Jarvis creates a diversified portfolio for you. You don’t have to worry about the right number of stocks to keep in your portfolio.
Keep track -No matter how good stock you may have picked, when you hold it for long, there may come a time you will have to sell it, and buy a new one. Hence, it is important you continuously track your investments. The frequency will depend on the kind of stocks you have in your portfolio. If you are an aggressive investor, you should review it twice a month. When you use an AI-based platform like Jarvis, you don’t have to do monitoring – Jarvis takes care of everything.
We hope now when you invest your hard-earned money, you know the risk you are taking and the potential rewards. Making profit through equity investment is easy – you just need to make the right decisions.