Most people are wary of entering the stock market due to a common misconception that it is akin to gambling. Due to this, new investors eager to join the stock market tend to hold back due to market fluctuations and the risk of losing their investments.
Even though the stock market has consistently given profitable returns to thousands of investors over the decades, most people continue to be hesitant because of the unfair stigma associated with it. Over the years, investors have reaped wealth by steadily investing in the right instruments, but due to bad advice and its association as a variant of the lottery, most others stay away from it.
However, the share market does not work based on a lottery nor is it gambling. Instead, it involves scientific algorithms and patience to stay invested in it. Additionally, an investor’s skills and learning plays a primary role in his or her investment that can decide profit or loss.
Most people who view the stock market as risky are those who are unaware of how the shared market operates or those who have not learned from past mistakes. It can help to study the share market and learn from a variety of authentic sources to make a sound and smart investment. The share market is risky for those investors who blindly put in their money without studying or analysing it.
Nevertheless, the share market does come with its bag of risks and caution, just as any other financial assets. Here we look at understanding and mitigating two primary forms of risks. These include:
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- Systematic risk: Systematic risk, also known as non-diversified risk, it is associated with the connection between the market in its entirety and the value of your specific investment. Unfortunately, this kind of threat is unavoidable. This is because if the market, overall, dips by a certain margin, it is possible that the shares invested could also plunge.
- Unsystematic risk: Undiversified risks or unsystematic risks are concerned with the possession of a particular stock. This means that if you have purchased the stock of a specific organisation that is performing poorly, it can directly cause the price of the shares to plummet. Unsystematic risk applies only to a particular company.
Analysing and mitigating systematic risk
As stated above, systematic risk can affect the entire share market. For instance, in 2007-2008, the stock market witnessed an overall recession that affected every share price in the industry. This was due to the culmination of various factors such as a decline of the banking system, high unemployment rates, and low value of homes amidst others. One way to counter systematic risk is to invest in shares that are immune to a recession.
Nevertheless, the only best option to combat systematic risks is through patience and time. The share market goes through its ups and downs over a while, and when perceived from a long term point of view, it rebounds with vigour. Investors looking to invest in the long term must not view systematic risk as a factor, because over time, the share market will provide good yields after its recovery.
Addressing unsystematic risks
The best way to mitigate unsystematic risk is to diversify one’s portfolio efficiently. Smart investment options such as to funds and exchange-traded funds can help expand a portfolio. At the same time, if you intend to invest in individual stocks through a full-service broker such as Kotak Securities, you will have to exercise additional time and energy. This is because, for a well-diversified portfolio, you may have to invest in 10 to 12 different types of shares, in a variety of industries that have various kinds of organisational-specific risks. To achieve this, you would have to be knowledgeable about the latest developments in the industry and be financially aware.
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If you view the share market as a long-term investment, it can be highly reliable. Although, the stock market faces slight hiccups over its course, sooner or later, it returns to normalcy. It can help to make smart investment choices and, in this regard, have thorough market research and analysis knowledge.