5 Ways to Help You Manage Stock Market Risks

"Mutual fund investment is subject to market risk". You must have come across this several times. But do you know what these market risks are? And how can you make higher returns despite the risk? Well, the article here has got the answers.

5 Ways to Help You Manage Stock Market Risks
5 ways to help you manage stock market risks
"Risk comes from not knowing what you are doing."
- Warren Buffett

Be it a beginner or an experienced investor, in most cases, people do not have an adequate understanding of the risks involved in the stock market. Making it worse are the underlying misconceptions regarding the same. So no thanks to Harshad Mehta (Scam 1992: The Harshad Mehta Story) for saying, "risk hain toh ishq h!"

You cannot randomly pick riskier stocks and hope for a miracle! Moreover, there is no substantial evidence to prove that 'higher risk means higher returns.' That is why you should go for a wise and safer alternative i.e., 'lower risk, higher returns.'
In the follow-up article, we'll be suggesting the five golden rules to help you manage the stock market risks.

Understanding the types of risks

You cannot solve a riddle without knowing the riddle! Same way, you cannot lower the risks if you do not understand the type of risks.
Primarily, in the stock market, there are three types of risks involved:

Market risk
It refers to a constant underlying risk caused by external factors such as inflation, political decisions, and even the present pandemic-like situations. These may or may not affect the entire stock market (all the stakeholders).

Graphical representation of the three major historical dips.

Sectoral risk
As the term suggests, it is more sector-specific. For example, you bought shares in a pharmaceutical company. Suppose 2020 happened! During the first wave of COVID-19, the government put a price cap on certain medicines. This impacted the company's profitability. Thereby, affecting your returns from the invested stock.
So these risks are limited only to a sector of the market.

Business-specific risk
These are the result of the internal workings of the company. For example, a change in packaging, marketing, and advertising strategies in a Fast Moving Consumer Goods Company like Nestle will impact the company's value, depending on the response from the consumers.

So when you pick up a company/stock, remember to outline the underlying risks involved in your company. For this, you may also take the help of various risk measures.

Diversifying investment portfolio

Mark this very important!
We all grew up hearing, don't put all the eggs in one basket. Well, it applies here. Maintaining a balanced portfolio will save you! For example, while investing in riskier stocks, you should also put a sizeable portion into safer investments like mutual funds or government bonds. The idea is if one part tumbles, others can balance it out. Thus, giving you an overall positive return.

Diversifying portfolio investment to manage market risks.

Regular monitoring

The market is volatile, and sometimes the market situation changes every second! It is situations like these that make monitoring all the more crucial. Monitoring can involve tracking interest rates, commodity trends, quarterly earning calls, etc. Active investors need to monitor daily, but if you are a passive investor or into a long-term investment, you can do it from time to time. However, you cannot just put in the money and forget about it!

Don't be emotional!

"The most important quality for an investor is temperament, not intellect."
- Warren Buffett

When it comes to decisions in stock marketing, do not base them on mere emotions. The truth is market ups and downs are constant. And using emotions in the stock market can make you vulnerable to a loss in returns, as well as the principal amount.
As per a report by BlackRock.com, in the two periods beginning 1992, investors made an annual profit of 2 percent while the market advanced at 8 percent. The report also shows how following the herd mentality can hit back.
So say 'NO TO HERD MENTALITY!'

Need help? Take help

Unlike earlier times, there is plenty of help available in the market. It is especially favorable if you are new to investing or thinking of starting it soon. This help is available in the form of reliable stockbrokers, stock market applications, stock advisories, online courses, training, and various online stock market research and analytics platforms (like Captwist).

Conclusion

According to Murphy's law, "anything that can go wrong will go wrong." Unfortunately, there will always be some uncontrollable risks in the stock market- the ones that you cannot foresee like, the present COVID-19 situation. However, it is crucial to understand that while you can not see the risk coming, you can still lower its impact. No matter what, having a careful understanding of the market, maintaining a balanced portfolio, and a little patience will always get satisfactory returns.