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Element of Risk in the Stock Markets

Any type of investments comes along with some degree of risk. These risks are of many kinds and vary in their magnitude. There are multiple types of risks affecting the value of investments such as interest rate risk, inflation risk, volatility risk, etc. While it is important to make investments on a regular basis, it is even more important to take into account the various risks that are likely to have an effect on your investments.

Investment opportunities like government bonds and fixed deposit schemes guarantee sure and fixed returns but investing in stock markets is a high risk – high reward option. That said, you can mitigate risks to a great degree by research aimed at selecting stocks in fundamentally strong companies.

To mitigate risks, you should focus on details and parameters that directly affect stock prices, such as:

(i)    Quality of management and their past track record;

(ii)    Relation of the stock with that of the market (i.e. beta);

(iii)    Magnitude of variation;

(iv)    Analysis of the company’s balance sheet considering important ratios, EPS, dividend distribution history, etc.

See this post – Learning stock market basics.

These parameters give you a lead before making stock investment related decisions.

Another important factor that you need to remember while making investments in the stock markets is that your returns are subject to taxation. As an investor you will have to pay taxes on income derived in the form of dividends and capital gains.