Reduce Investing Risks

A good investor must understand the environment in which he is making investments to minimize risks. All investors have to constantly evaluate the mixture of risks linked with their investments. Money in a savings account takes for granted no risk factor, since the return is exactly what was originally expected. The further an investment moves away from expected return, greater the risk. In short, risk can be defined as uncertain return.

Business Risk
It refers to the risk of doing business in a particular industry or atmosphere and it gets repositioned to the investors who invest in the industry or the company. It has everything to do with equity market. The risk, simply put, is that the company whose shares you have bought may go down. While a bond or debenture holder has some recourse to the companies assets in such a situation, the shareholder is left to the mercies of the exchange.

Market risk
Market risk refers to the unpredictability of returns due to fluctuations in the equity market. All equities are open to the elements to market risk but equity shares get the most exaggerated. This risk includes a wide range of factors exogenous to securities themselves like wars, political situation of the country, etc. Market risk is the risk that the value of an equity, stock etc. will decrease due to moves in market factors. Forces that affect the whole economic system and bear directly on the markets are generally inescapable. Like the spring rain, they fall equally on all, and no amount of portfolio diversification minimizes vulnerability.

Interest rate risk
Interest rate risk refers the unpredictability in a security's return resulting from changes in the point of interest rates. The basic rule is other things being equal, security prices move inversely to interest rates. The reason for this is related to the valuation of equities.

How you can reduce risk?

To a number of degree investors can handle risk, or at least make it bearable. Each type of risk can be countered by employing some market ploy. This will support in keeping the amount of coverage that comes with each risk circumstances. For example, an investor can grip interest rate risk by appropriate timing to counterbalance interest rate shifts after cautious learning of the business sequence. On the other hand, market risk can be optimized, by appropriate diversification of securities . Most investors make the mistake of buying only two or three securities/ equity. It is suggested to keep at least 10-15 securities in your basket. To reduce the business risk, one can take a much conservative view and invest in mutual funds. Mutual funds can give high returns and also can take care of business risk by keeping all sorts of business securities in their basket. It is understood from the above that one can control risk factors by becoming more vigilant and by investing in big basket which is full of securities.

By Priyanka Grey