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Types of Risk in share market


Types of Risk in share market

In general terms, the risk is something unpleasant or an unexpected event that causes some harm. When we expect something and in return get something different, that is a risk.

When you expect a more significant amount in the financial market, but if you can't get that amount for various reasons, this is also a risk. Now, what are the reasons you cannot get what you expected?


If you are planning to enter into the shares market, or if you are already in, you must be aware of the types of risk in share market. Shares, in one sense, can be said as a good investment, as you can earn a dividend on them regardless of the price fluctuation. On the other hand, stock and derivatives are very risky, they can be helpful for long-term investment, or when you are sure enough to get the excellent profit/resale value from that derivative, it is a good choice for you. But even though you are planning to invest in stocks and derivatives, you must be aware of the types of risk in the derivatives market and the risks of investing in the stock market, respectively. Knowing them, predicting them and taking the necessary steps for them will save you from a significant loss. There are a lot of risk factors associated with any investment; whether it is for a short period or the long term, the risk is always there, and you can mitigate that by thinking logically of your next move.


You must also be aware of the types of risk in derivatives market and the risks of investing in stock market. You need to study first about all such reasons or types of risk involved in the financial market. The risk in the financial market can be classified into two broader categories-systematic and unsystematic risk. Speaking of systematic risk, it represents all the external factors that may have an impact on the whole industry, or we can say stock. In comparison, unsystematic risks are those whose effects are visible on one particular asset.


types of risk in share market

  • Systematic risk: The impact of which can be seen on the whole market.

  • Unsystematic risk: The risk which is specific to a particular asset.

  • Political risk: The effect is seen o the performance of an asset because of political decisions.

  • Financial Risk: Here, a company's risk-bearing capacity can be determined by its capital structure and contingencies plan.

  • Interest rate: Any risk involves variation in the rate of interest on a particular asset.

  • National or Country risk: The risk involved by trading with other nations.

  • Environmental risk: the risk due to change in the climate or environment.

  • Operational chance: It happens when you are unsure about the company's operations, supply chain management and profit-sharing plan, and the provision for risk mitigation.

  • Managerial risk: The risk involved due to a wrong decision of the top management.

  • Legal risk: It is a type of risk related to the law and justice and freedom to operate in a particular asset.

  • Competition: This is something you cannot change, the degree or level of competition in the market and the impact on your investment due to the competitor's choice.

The ones mentioned above are the risk involved in the share market. Apart from these, there are other types of trouble in the derivatives market or risks of investing in the stock market. Let us go through them.

Types of risk in derivatives market or risks of investing in stock market

  • Market risk: The risk of declining the value of investment because of economic developments that can affect the entire market.

  • Equity risk: this type of risk is involved explicitly in shares when the market price of shares drops tremendously.

  • Interest rate risk: As seen earlier, it is the risk of losing the amount due to a change in the interest rate.

  • Currency risk: It applies when you are investing in the stocks of another country or are involved in foreign investment.

  • Liquidity Risk: Liquidity risk can be applied when you cannot sell your stock in a time of need. Sometimes, you might lose money to fulfill your financial needs by selling at a lower price.

  • Concentration risk: This risk is involved when you invest all your money in just one type of investment. To mitigate this type of risk, you have to diversify your investment in various derivatives.

  • Credit risk: The credit risk can be said when an entity or some company issues shares bonds and cannot repay the principal amount at the time of maturity, then this type of risk can be said as credit risk.

  • Inflation risk: As time passes, your purchasing power decreases because you can buy fewer items with the same money as before.

  • Horizon risk: You might have a different Investment horizon, and if one gets affected, the impact can be seen on others.

Summary

Though we have mentioned the types of risk in share market, types of risk in the derivatives market, and risks of investing in stock market separately, somehow, they apply to all of them in one way or another, so if you are planning to invest in any financial instrument, go through this article to know, what might be the future risk you are buying as complementary.

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