Risk Management Strategies for Stock Market

Stock market is like a roller coaster and you cannot always predict its movement. ‘Risk’ is the term you would have to face regularly if you want to invest in stock market.
Prevention is always better than the cure and there is not enough space for cure in stock market. So, you should know about the risks so that you can avoid them in your investing days.

What are the risks?

Strategy

You can have a very well settled strategical plan for your investment. But can you ever guarantee that the plan will always lead you to success? You can’t. Nobody can’t. Because nobody actually sees what lies in the future days. There can be many events that can shatter all of your calculations in no time.

So, the first risk is going to come up is the strategic risk. Adapting with the changes is the only way to cope up. Be prepared for every attack, don’t ever think that everything is settles just because you have a good strategy.

Source: Technical Analysis of Stocks

Compliance risk

There are several laws in the world of stocks. Before investing there, you have to comply with the law, rules and regulations. Bur the ‘unpredictability’ again pops up here! Laws also change time to time. You can have such a product that needs explicit advertisement, but rules at that time don’t suit your content. You will have to change the nature of contents, productivity may also decrease because of this change. This kind of risk is known as ‘compliance risk’.

Trader Trader Gregory Rowe works on the floor of the New York Stock Exchange at the end of the trading day.

Financial risk

Finance is the core part of stock market and it covers a lot of place in your investment strategy. Financial risk simply refers to money loss in your business. This can happen for different causes. It may happen because you have provided a large part of the share to a single client, that too for a long time. This can cause you a regular profit, but a large risk also remains in this case.

How to deal with risks?

You can be afraid like other investors and surely can stay away from this ‘risky’ business idea, but if you look very carefully, you will find the ways to cope up with the risks. Focus on some key factors

Use stop-losses: Authorize your broker for selling a stock automatically when there is a fall to a specific level.

Diversify Portfolio: Holding stocks from various unrelated sectors for avoiding excess exposure to one or a few of those.

Add non-cyclicals to your portfolio: Invest a fair amount of you corpus in stocks which are immune to business cycle volatility such as Pharmaceutical & consumer goods with a good pace.

Use some hedging: Use stock futures and other options for providing a limitation to the losses at the time when trades start backfiring.

Invest in stocks that include payment as dividends: Invest in stocks which pay a dividend so that the returned amount are usually more predictable.

Trade the pairs: It’s a quite good term for ‘quick exchange’. You can buy shares from some company and also continue selling shares from similar companies. That would minimize the losses irrespective of which way prices move.

Source: YesRox.com

These strategies are known as ‘Equity Risk Management Strategies’. These help you to bypass the fundamental risks that regularly rise in stock market. If you get a grip on these strategies, you can get a sigh of relief that the risks are not going to get on your nerves anymore, not like before.

References:

  1. https://business.tutsplus.com/tutorials/the-main-types-of-business-risk–cms-22693
  2. https://www.edelweiss.in/investology/introduction-to-stock-markets-51c006/how-manage-risk-in-stock-market-hedging-006120

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