5 Things To Know About Stock Market Risks

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  • 02 Feb 2023

We all wish to get maximum return on our investment. However, there is nothing like a risk-free investment.

Here are 5 things you need to know about Stock Market Risks

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.

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.

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.

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.

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.

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