Just like anything else, stock market is also full of risk. Risk mainly comes when you do something without proper knowledge about that. The biggest risk in stock market is the loss of your investment. Here, you will get 10 best tips to minimize risk in stock market and protect your investment.
In stock market, there is high chance of loosing your hardly earned money in short time if you invest without intelligence and proper knowledge. Protecting your investment is more important than making profit in stock market.
So, risk management is a very important factor that you must focus on before investing in stock market. Risk management is simply putting your investment in a safe zone. It is trying to make make high profit with minimum risk. So, in this article, I will give you 10 tips to minimize risk that will help you to make profit with minimum risk in stock market.
10 Types of Risk in Stock Market
1. Market Risk
In stock market, market risk refers to the fluctuations in the price of share thought the day. When share market open, the price of you share can either go up or down. If price goes up, you make profit, and if price goes down, you face loss.
Market risk is the risk of selling your share due to fear, quick need of money or some other reason at the time when price of stocks are falling or market is in bearish stage.
2. Company Risk
It is also called business risk. It is the risk of fall in the price of stock due to company’s internal or external fault. This type of risk arises due to many reason such as fraud in the company, leak of some bad news about the company or management team etc.
3. Economy Risk
The overall economy of a country has great impact in stock market. Economic factors like economic growth, economic policies, economic development, interest rate, inflation etc. play great role in the price fluctuation of a stock.
4. Political Risk
Politics has also a great impact on stock market. Any changes in political environment of a country directly affect the movement of share market. Political factors like change of government, fraud by political person, election etc. highly affect the price fluctuation of stocks.
5. Liquidity Risk
Liquidity simply refers to the availability of cash to a company to fulfill it’s requirements. If a company is facing liquidity problem then it won’t be able to pay it’s bills, clear debts and can not give good return to investors in the form of dividends.
6. Interest Rate Risk
Interest rate is considered one big the big factor to influence the share market. Any changes in the interest rate of deposits and loans of banks can direct affect the stock prices. Because, big portion of investment in share market come from bank loans.
So, if interest rate increases, market decreases and if interest rate decreases, market increases.
7. Taxability Risk
The changes in tax policy of government instantly affect the share market. If the government increases tax rate on the company in which you have invested, the price of stock will decreases because high tax denotes low dividend paying capacity of a company.
8. Inflation Risk
Inflation refers to the increase in the price of raw materials, products and services. An increase in the price of raw materials also increases the production cost of a company. If production cost increases then there will be decrease in the profitability of the company. And, decline in profitability indicates decline in the dividend paying capacity of the company which provides bad effect on stock’s price.
9. Climate Risk
Sudden and bad changes in climate and environmental factors provides negative effect in share market. Factors like earthquake, floods etc. can cause big economic and human losses to a country and it creates an environment of fear. So, it provides very bad impact in stock market.
10. Fraud Risk
Any kind of governmental, banking, political and business fraud activities directly affect the movement of share market. For example, let’s suppose, the governor of central bank has doe fraud of 5000 crores in share market, then it will suddenly decline the market.
10 Tips to Minimize Risk in Stock Market
1. Do Not Invest If You Don’t Have Proper Knowledge
Risk is simply doing something that you don’t know. So, if you are a beginner in stock market then I will suggest you to gain sufficient knowledge about the stock market like how it works, how investors make profit, how to analyze the company, what factors affect the stock price and market etc. To learn anything about stock market, you can take help of YouTube.
2. Do Not Trade If You are a Beginner
In stock market, people use their money either to invest or trade in shares. Investing refers to buying a company’s stock for long term whereas trading refers to buying a company’s stock and making profit in short term. So, if you are a beginner, it would be best to start with a purpose of investing and later you can start trading when you have become experienced.
3. At Beginning, Start With Small Amount
If you are beginner in stock market, you should start investing with a small amount and later when you have actually learned how to make profit, you should increase your investment. Entering into share market as a beginner with full investment create high risk and might be danger for you.
4. Choose Fundamentally Strong Stocks
Fundamentally strong company is always safe for investment than fundamentally weak company. If you have bought a , you should not worry about the price in any situation. Strong companies can multiply investment by paying good dividends to the investors every year.
5. Do Not Trade Against the Trend
To become successful in stock market, you should always go with the trend. You should be able to read and analyze the charts and do technical analysis of the company. Generally, if the trend line shows that the price is going up and everything is positive in the market, this is the time to invest. And, if trend shows decline in the market and everything going negative, this is the time to exit for some time.
6. Do Not Follow the Crowd
One of the bad habit of new investor in stock market is that they invest in the same company in which majority of investor go for. This might be beneficial for sometime, but for maximum time, new investor have to face loss. So, it is always better to choose right stock on the basis of your own intelligence rather what crowd do.
7. Right Use of Stop Loss Technique
Stop loss is a very good technique that save you from facing big losses. It help you sell the stock with minimum loss if there is worse situation in the market. For good use of stop loss technique, you should be able to know the nature of market, and predict the future.
8. Do Not Fall in Love With the Stocks
If you are a trader, It will be very bad decision to stick with a single stock. You should be able to take buying and selling decision at the right time. You should choose to buy different stocks at different time in which you see profits.
9. Diversify Your Portfolio
Diversifying the portfolio is one of the common technique that investors use to minimize risk in stock market. It is just investing in the shares of different sector’s companies. So, if anything bad happen in one sector, another sector’s stock can save you.
10. Keep Yourself Informed and Updated
An intelligent investor always keep himself informed and updated about market, news, government activities, economy, invested company etc. This helps to predict future good and bad impacts in share market. So, it minimizes the risk.
So, these are the top 10 tips to minimize risk in stock market. I hope these 10 tips will be helpful for you. Please do not forget to provide your feedback in the comment section below. Thank You!
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