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

Key risks for investment in publicly traded stocks:

1. Economic risk: The economy of the entire country may be not be growing due to several reasons such as global recession, wars and internal policies

2. Capital loss risk: The invested company may not be performing well and its market cap can reduced drasticaly

3. Volatility risk: Certain stocks are extreme volatile everyday and price may increase or decrease depending on the news or othrr events

4. Sector specific risk: Certain changes in the policies of a sector can lead to erosion of the invested value

5. Timing risk: Investors may enter the market when some of the stocks arr already trading at high valuation and prices may start declining afterwards

6. Liquidity risk: Some small caps and mid caps companies doesnt provide liquidity to buy and sell at desired price

7. Exchange rate risk: Investing in foreign traded companies can expose an investors to the foreign exchange risk which might become unfavorable driven by changes in the policies of the countrry invested

Steps to reduce the risk:

1. Best way to reduce risk is through diversification, investing across different sectors and different companies helps to minimize risks related to stock specific factor

2. Due diligence before investing helps to reduce the risk related to investing in fundamentally weak companies

3. Investment strategies should be well defined before investing

4. Monitoring investments after the investments will help to avoid loss due to any drastic changes in the price