Types of Risks Associated with Investing in the Stock Market

Investing in the stock market is not always profitable, as there are various types of risks associated with investing in stocks. These risks could affect the stock market movement as well as the price of the individual stocks that you need to understand before investing.

Though, the stock market is already a high-risk investing place but it can also give you the highest returns within few days. Everything here is all about checking the various aspect that can affect the stock price movement and then buy the stocks only after analyzing the growth driving and risk factors both.     

7 Types of Key Risks Associated with Stock Market

#1 Systematic Risk

This is also called the “Market Risk” that is directly associated with the overall movement of the stock market. This means the performance of you stock you have invested is associated with the entire stock market movement, if the trend is bullish and the market moves in an upward direction your stock will also move slower or faster but will give positive returns.   

During a recession or pandemic-like situation, the financial markets across the world started falling and no individual stocks can avoid such risks. Hence, while investing in the stock market also check the current market trend and sentiments of the investors in the secondary market. 

#2 Unsystematic Risk

Unsystematic risk is directly associated with the fundamentals of the company, yes it is a company-specific risk or you can say non-systematic risk that is associated with the company-related issues. And any kind of negative or positive impact on the operational activities or revenue growth of the company can also affect its stock price movement.

Also Read: Factors to Consider Before Investing in Stocks of a Company

Moreover, the changes in the business model, capital structure and key management of the company all are unsystematic types of risks that are directly associated with the company. Hence, before you invest in any company research on such things or keep an eye on such issues.    

#3 Political Risk

A favorable political condition of a company is not only good for the growth and development of the economy but also promising for the corporate sector. And any kind of political unrest or unstable government also discourages the sentiments of the people investing in the stock market.  

A government with undefined economic policies, lack of controlling the inflation or unfavorable monetary policy, fiscal policy or foreign trade policy will also affect the stock market movement. Your stock price movement has such risks, if the entire sector is impacted by such policies.    

#4 Regulatory Risk

The entire stock market in India is regulated by the central government-formed regulatory authority SEBI. The unusual activities in the stock market or unexpected trading in individual stocks are monitored by the watchdogs & stock exchanges to keep the investors’ money safe from strange activities.    

Apart from that most sectors in India are also regulated by the government with instructions to comply with certain rules and regulations. The banking, pharma, telecom, alcohol-making companies and cigarette makers are highly regulated by the central government and designated authorities. 

#5 Company Risk

This is like the systematic risk, but directly associated with the revenue growth and performance of the company. If the revenue and net earnings of the company are not growing well or as per its peer group companies, then it will also affect the movement of the stock price in the market.  

The operational efficiency and net margins are improving or not as per the sector trend. All such factors affect the stock price movement. Because the stock price of the company is justified as per its valuation and that is calculated with the net earnings per share of the company.    

#6 Risk of Liquidity

The financial health of the company is good enough, if liquidated, it can meet its liabilities or not. Or a company is capable of paying off its debts or its outstanding bills or not. All such company-related liquidity factors and risks affect the stock price movement.

On the other hand, in the stock market, liquidity risk is associated with the volume of trading in the specific stock. Suppose you bought the stock of a company that is not frequently traded, then at the time of selling the same stock, you will face the risk of liquidating your investment.

#7 Risk of Volatility 

The stock market does not always move smoothly, there could be turbulence due to unfavourable economic data like GDP growth, inflation, Industrial production growth and foreign trade conditions. If the stock market is volatile it will also encourage other stocks to be traded with volatility.      

Also Read: 5 Reasons & Benefits Why You Should Invest in Stock Market

High volatility in the stock market or individual stock means the price is not moving in a single direction, it can move highs and lows during trading hours. And this kind of volatility in the market makes investing risky, especially for traders doing intraday or short-term trading.   

Summing-up

Understanding such risks before investing in the stock market is very important to make your investment safe and profitable. However, such risk associated with the fluctuation of stock prices does not always come at the same time or with every stock trading in the stock market.

Depending on the economic conditions, sector trends, stock market conditions and sentiments of the investors towards a particular stock all such factors affect the stock price. But you need to be very careful about such risk while buying any stock or while investing in the stock market.  

Despite of getting aware of such risks if you still want to invest in the stock market, then open a demat and trading account right now and start investing in equities. Risk is everywhere in life, so don’t get afraid but invest wisely and enjoy the combination of high risk with high returns.

Disclaimer: The views and investment tips expressed by investment experts here are their own and not those of the website or its management. And the movement of recommended stocks are subject to the movement of the main index or entire stock market. Hence, there is risk investing in the stock market, it is advised users to check with certified experts before taking any investment decisions.