Only 4% of Indians invest in the stock market. The others prefer to stay away from it. There is a belief that the stock market is risky, and people lose money in stock investment. The statement is only partially correct. Only those who don’t know how to manage risk lose money in the stock market.
Risk management is essential if you are investing in the stock market. In this article, we will talk about risk management, why it is a must and strategies for risk management.
What is risk management?
Risk Management is a process through which you identify and assess the risk and then develop strategies to manage and minimize the risk while focusing on maximizing returns. There is a strong relationship between the risk and the return – higher than risk, higher the return. In the stock market, you cannot invest with zero risk. If there is no risk – there is no gain. We request all our readers to take risk management seriously before investing any significant amount in the market.
Why is risk management essential?
There are three types of risks in the financial markets. One is the economic risk – if the country’s economy is not doing good, your investment is at high risk. Second, company risk, where the company itself is going through tough times. Third, inflation risk, where the currency’s purchasing power reduces over time. Now that you understand different risks, let us comprehend why managing them is essential:
- Prepare for the unexpected – You cannot plan for everything that will happen to you in the future. However, you can try and minimize the effects felt under adverse circumstances if you do risk management.
- Tell you the best investment options – There are many lucrative investment options available to you. When you practice risk management, it enables you to identify the best investment options in the market – high returns with relatively low risks.
- Minimize the risk – If you invest in high-risk stocks (small and mid-caps) without following risk management strategies, you could get in trouble. Risk management lets you make high-risk investments and not worry about the investment.
We are in a critical section of the article – how to do risk management? There are specific strategies you must follow to minimize risks and maximize returns. The top ones are as below:
Do your homework – The first step is to understand the risks. To understand, you will have to do some homework. If you have decided to invest in the stock market, you should learn to read the company’s balance sheet. Also, spend time understanding inflation, interest rate movement, and other parameters that drive the market.
Follow the market trend – Most new investors think that they can invest in any stock at any time and succeed – not true. You will have to follow the market trend to mitigate the investment risk. For example, the market trend suggests that companies getting in Electric Vehicles will benefit in the future. If you invest in a company that does not plan to move to EV, you are not following the market trend.
It is difficult to identify a trend as the market is constantly changing. However, if you stay focused, you can spot the trend.
Diversify – We have talked about it in so many articles and different forums. You should not put all your eggs in the same basket. You have to invest in multiple companies from various sectors and market caps. Along with it, you should also invest in ETFs, mutual funds, etc. Diversification will reduce your risk as even during a market crash – you will have some instruments that will not be going south, and it offers a cushion.
Risk management tools – You should use risk management tools like stop-loss when you take entry into a new stock. It is even more essential if you are investing for a short period. For example, you make an investment of Rs 10,000 for six months and don’t put any stop-loss. If the stock corrects 20% post your investment, then chances are you won’t make any profits in the six months. Similarly, have an exit strategy. If the goal of 100% returns is accomplished, you should exit your investment without delay.
Practice patience and avoid quick decisions – Only those who have patience make money in the stock market. Many investors make hasty decisions even with small price movements and suffer losses. For example, the first week of December saw a good fall in the market. If you panicked that time and sold your holding, you would have lost money. If you had been patient, you would have been rewarded. The market recovered in the second week.
There is no doubt that the stock market is risky. However, smart investors take advantage of the above risk management strategies to mitigate them. We hope you will implement the above strategies in your investment journey. If you think it is too much effort, we have good news for you. We have created an AI-driven platform that helps you in stock investment. At the same time does risk management for you. Isn’t it great? If you think so, do download our app and explore Jarvis Invest.