Investors who are comfortable with the risk of volatility should consider share trading. A knowledgeable investor can find rewarding opportunities even in the downturn stock market. There is a positive correlation between the potential risk and the potential for return. When an investment has the potential to provide higher returns in a short period, you should understand that the investment must be risky and share trading has that potential for big returns. Therefore, you should be aware of the risk involved in the stock market.
You need a Demat account and trading account to start share trading. With a Demat account, you can save yourself from the risks of fraudster activities in share trading. If you are using an advanced trading platform, you can experience hassle-free trading trades.
If you are aware of How to open a trading account then you can open a 2-in-1 account with a registered stockbroker. An investor can open a Demat account and trading account altogether online with a PAN card and address proof.
Types of Risks
1. Systematic risk
It is also known as market risk. Factors that impact the whole market like economic recession, inflation, currency rate fluctuations, etc are associated with systematic risk. It is the reason for volatility in the stock market.
2. Business Risk
Business risk involves reasons like the failure of management, poor quarter results. If you have picked stocks of a company that is under business risk, you may have to face heavy losses. Analysing of financials of a company will be helpful to avoid this risk.
3. Liquidity Risk
Companies with high debts will have liquidity risk. When a company unable to meet short-term financial obligations/debt due to exceptional losses. If you invest in such stocks, you may not be able to sell it for a reasonable price due to a lack of buyers. Before investing, you should definitely check the solvency of a company.
4. Regulatory Risks
Several regulations are imposed on companies. For example telecommunication, beverages, pharmaceutical sector are highly regulated by the government and regulatory effects may impact the company’s stock price.
5. Inflationary Risk
Obviously, inflation impacts the stock price negatively. Companies involved in commodities are the most affected companies by inflationary risk in the long run. However, these industries can provide higher returns from the inflated price.
There are various other risks also such as social and political risk, credit risk, exchange rate risk etc.
High yield investments
Some of the high yield investments that offer additional return are as follows:
Options are for the investors who want to time the market. Options can be dangerous and rewarding as well. It is a risky investment because it involves time limits on the purchase/sale of underlying securities. It is not advisable to time the market. Understand how options work before investing in it.
Initial Public Offerings (IPOs)
IPOs attract a lot of attention but response towards an IPO can slant valuations. Most IPOs fail to generate significant returns.
High yield bonds
High-yield bonds are corporate debt securities issued by startups or capital-intensive firms that have lower credit ratings due to high debt ratios. They compensate investors with a higher yield. You can buy high yield bonds directly, but you should consider high yield bond mutual funds or ETFs over the individual bonds for diversification advantage.
You must have heard this that successful investing is the result of managing risk, not avoiding it. Consider buying the stocks only after understanding the risk involved so that you can manage it. The risk is manageable with fundamentals and technical research. Strategies are also used to manage risk. Still, the return from share trading is not guaranteed. Even one can lose the entire money invested in stocks. You need to tackle risks with a high degree of skepticism so that you get rewarded for taking on greater risk. Diversified investment portfolios have the potential to provide significant profits with minimum risk. Stay focused on what is dominant in the long run.