Question

When the stock market is going up over a long period of time, investors can become complacent about the risks of being a stockholder. After the significant decline of the stock market in 2008, people have begun to rethink the risk involved in owning stock. What kinds of risks do the owners of publicly-traded companies face? What could you do, as an investor, to continue to invest in the market but minimize your risk

Answer 1

An investor faces Systematic and systematic and other risks while investing in the stock market. A systematic risk is also known as Marketplace and cannot be diversified. The unsystematic risk is the risk of an individual stock and can be minimised through diversification. An investor also faces other risk such as opportunity and liquidity risks.

As discussed above an investor can reduce the unsystematic risk involved in the stock market with the help of diversification of his portfolio. The portfolio should consist of a variety of products which should be a combination of risk free and risky assets. Conducting thorough research before making the investment will also reduce the risk of investing in stocks. One such Matric that should be closely observed is a stock price to earnings ratio. Higher price to earnings ratio represents higher risk and search stocks can be avoided. Lastly regular monitoring of the Investments and active management of the portfolio will help in reducing the risk involved.