*This article does not constitute as investment advice. Please invest at your own risk. Investments can go down as well as up. For further information, please consult a investment or financial advisor*
Investing, though used to generate reward, is risky. We’ve all heard the horror stories of people losing their entire investments in the stock market. If we truly want to invest to increase wealth, we should understand what we’re dipping our toes into. Awareness is always the key to navigate any unfamiliar sights - even in stock markets. This article will make you aware of the risks associated with investing.
What is risk, why do they exist, and why do you need to look out for them?
Risk refers to the degree of uncertainty and/or potential financial loss that may come with an investment decision. There is always the possibility of a loss of money to investors. Generally, the higher risk, the higher the return. But it really depends on each individual's risk appetite and whether they can handle risks.
Unfortunately, risks cannot be fully eliminated. The term ‘risk-free’? Yeah, that’s not true when it comes to investing. It’s impossible for risks to be non-existent but there are ways to control and minimise them. The first step to risk management is Risk Identification. You have to know what you are dealing with first before you can implement measures against them.
The following are the risks you need to look out for:
1. Trade Risk
Trade risk is the probability of losing part or all of what you invested in the market or trading platform. Simply, the amount you pay to enter the trade is your risk.
2. Market Risk
The most well-known and feared investing risk is market risk. This is the risk arising from market changes to which an organisation or a stock investor has exposure. You cannot control market risk. The market for investors will always be shaped by changes in commodity prices, interest rate moves, or foreign exchange fluctuations. Whatever happens in the market may affect your stock portfolio.
3. Margin Risk
Margin is the sum of money borrowed from a broker to pay for an investment; it is equal to the difference between the investment's entire value and the loan sum. The biggest risk from buying on margin is that you can lose much more money than you initially invested.
4. Liquidity Risk
The risk of being unable to swiftly turn your investments into cash is known as liquidity risk. Most people rarely consider this danger while making investments. The rule of thumb is to not put any money into investments that you’re not able to afford if you lose it. It should be noted that investments that are subject to lock-in periods and cannot be readily traded off harm liquidity.
5. Overnight Risk
Day trading is when you open and close your position on the same day. In general, holding day trades overnight is indeed risky and should only be done by the most experienced equity traders. Losing a deal or not, it's usually preferable to close it off and begin again with new trades the next day. A stock can change due to numerous variables overnight, thus both a substantial loss and a large gain are possible.
6. Volatility Risk
The rate at which the price of a stock rises or falls over a specific time period is known as volatility. A stock is said to have high volatility if its price experiences huge fluctuations of highs and lows in a brief period of time. There is an evident lack of security in the stock’s value. Higher stock price volatility often means higher risk. However, investors have the opportunity to make significant, long-term gains when they invest during periods of market volatility, as the best days in the market often follow the worst.
Now we have put all risks on the table, this information can be used to help you decide if investing is for you. By being completely informed of the risk you face and recognising your levels of risk tolerance, investors like you can get over any fears of investing and make informed decisions!
Fempire Finance