7 Types Of Risks To Know As A Stock Market Investor

What all risks do you face as an investor in the stock market? How do they impact your purchased stock's price? Read on as unfold all this for you.

Vanya GautamUpdated: Mar 08, 2022, 10:51 IST
5 min read
types of risk in stock market
shutterstock

"Stock market investments are subject to market risk. Please read scheme-related documents carefully before investing." Surely many of us must have heard this disclaimer when watching stock market advertisements, right? But seldom are we able to understand it.

Are you aware of the risks surrounding the stock market? Is market risk the only risk? What are the other types of risks a stock market investor faces?

If you are curious to know all this, let's deep dive and understand the risks involved in stock market investing.

types of risk in stock market shutterstock

Also Read: From Netflix To Apple: NSE IFSC To Start Trading 8 US Stocks From Today

1. Market risk

Whenever you buy or sell a stock, what determines the profit or loss? Quite naturally, it's the stock¡¯s price, isn't it? The price at which you buy the stock and the price at which you sell it, determine the investor¡¯s profit and loss from that investment. And given that stock prices keep fluctuating every day and within the day too, it's this market risk that every stock market investor should be aware of.

These ups and downs in stock price are driven by not one but multiple factors, but ultimately due to the supply and demand at that point of time in the market. Other factors that impact the stock price and the demand-supply, include the company¡¯s EPS (earning per share), P/E ratio (price-earnings ratio), short term trends, liquidity, impact of news, investor demographics etc.

So, overall, the risk of incurring losses in the stock market is what is referred to as market risk. Market risk ultimately exists because of the stock price changes/fluctuations.

2. Interest rate risk

From loans to deposits, changes in interest rates by the government are based on the direction in which the economy is headed. So, if the interest rates increase, companies get loans at higher rates, which can thus cut into their profits and affect their stock price.

Whereas on the other hand, if interest rates are on a downfall, then it can be an indication of a slowdown in the economy, which can lower the demand in the market and economy, hence leading to businesses suffering losses too, which can not only impact their dividend declaration but even impact their stock price adversely.

That¡¯s why having a balanced interest rate regime is often deemed healthy for the stock market as well as the economy. A drastic shift towards high or low interest rates can sound an alarm.

3. Company Risk

We all know that a share is a piece of ownership you get in the company, as a stock investor. So, ups and downs in a company¡¯s performance affect its stock price too. Simply put, if the company is performing well, its stock price can witness a rise. Whereas on the other hand, losses or problems in business, or downfall in revenue, then the stock price can fall.

That is why it's always advisable for investors to analyze the financial strength, management, etc of the company before investing in a company¡¯s stock.

risk shutterstock

Also Read: Explained: Sensex, Nifty & Their Role In India's Stock Market

4. Regulatory risks

There are lots of companies listed on the stock market. And all such companies are spread across various sectors, aren't they? Some belong to the telecom sector, energy sector, whereas others are from the financial services sector, pharma sector, agriculture sector etc.

And amongst all these, many sectors are governed by different regulatory bodies and can also involve the government as well. So, any change made by the regulator or announced by the government can impact the business of all companies in the concerned sectors, which can result in a rise or fall in its stock price drop.

5. Liquidity risk

Besides gaining profits from the sale of stock, dividends are another source of income in stocks. It is mostly preferred by those preferring regular income from their stock investments. And to declare dividends, the solvency or liquidity of the company is crucial. A company with liquidity problems can cut back on dividends or at worse, find it difficult to even clear its bills or repay its debts. All this can have an adverse effect on the stock price of the company.

6. Taxability risk

Just like regulations surrounding companies, there are taxability rules as well that govern the company whose stock you have purchased. And given that the government tends to keep changing tax rules based on the needs of the economy, the stock price of the company whose sector¡¯s tax laws get tweaked can get affected. So, for instance, if the sector in which you purchased stock, gets new tax levied or existent tax gets increased, the stock price may fall, and vice versa.

7. Inflation risk

Last but not the least, is the inflation risk. Simply put, inflation is an overall increase in the price of commodities and products in an economy. When the inflation rate rises, companies have to spend more to procure the same amount of raw material. And such a rise in inflation reduces the purchasing power of the company, which can impact the profitability of the company and cause a drop in share prices as well.

While these are amongst the primary risks impacting the stock market investor and the stock prices, there are various other risks as well, like political risk, social risk, currency risk, etc. So, it's clear that there is a wide array of risks involved in the stock market which an investor should be aware of, as all this would impact the investment returns as well because of the impact on the stock price.

Ultimately, it's all about understanding and managing the risk in order to avoid incurring losses on your hard-earned money. In the next article, we¡¯ll deep dive into the ways to manage stock market risk.

Also Read: Decoded: 20 Basic Stock Market Terms You Must Know Before You Get Started

For more of such interesting and simplified financial content, keep reading Worth. Click here.

5/1/2025 23:36:33
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