Last week we understood basic rules which every new comer must follow while investing in stock market. Now this week we shall try to understand various risks factors associated with investing in stock market and how one can manage them.
There are various risk factors associated with stock market investing which one not only needs to understand but also effectively manage.
Some of the risks associated with stock market investing include -Economic Risk or Market Risk, Industry or Company Specific Risk, Inflation Risk, Interest Rate Risk, Exchange Rate Risk, Credit Risk, Regulatory Risk, Black Swan Event Risk, etc
Now as an investor your job is to effectively manage these risks. As this is what is called as Risk Management.
Regarding Risk Management Benjamin Graham says,
Successful investing is about managing risk,not avoiding it.
The first and the most important step in risk management is acknowledging the fact that risk is to be faced. It may sound strange, but to start with one has to accept the fact that there are some risks that have to be faced.
Some of the risks like market risk, interest rate risk, inflation risk, regulatory risk or even risk related to black swan event are beyond one's control. Such risks are known as systematic risks and have to be faced
No matter how careful you are, you cannot eliminate those risks, but you can surely minimize their effect by using Benjamin Graham's concept of "Margin of Safety" i.e., never over paying, no matter how exciting an investment seems to be.
I shall explain the concept of Margin of Safetyin detail some day later. One should remember this famous quote of Benjamin Graham in this regard, "High valuations entail high risks." Some other important ways in which investors can reduce risks include -
- Constant Learning
- Diversification
- Long Term Investing
- Hedging
Next week I shall explain all these methods of Risk Management in detail.