Tips to help you beat stock market risks

Risks in stock markets

The Sensex knows no smooth ride. Huge crashes are more often reminisced and abhorred by small individual investors who have lost their hardearned money. The year 1992 witnessed the Sensex plummet from unimaginable highs. Not very long ago, in the year 2000, it wasn't kind to investors either.

The Internet sector and other related fields saw extreme buyer interest and price boom. Finally, the dot com bubble burst, bringing down share prices dramatically and many firms went out of business.

The past few months witnessed a fall of more than 50 percent in the domestic markets. With an increased impact of global forces and foreign institutional investor (FII) involvement, the reason for the fall is myriad. It is not only local forces but also a host of global factors that pulled the markets down.

Investors who have their portfolio's worth down by half were looking at fixed deposits and other safer avenues to park their surplus. The element of risk in equities is an ugly deterrent.

Weak economy: When the overall economy is at its ebb, unemployment at its peak, real estate sector on a downslide and growth eluding, economic risk factors come into play. A weak economy will impact the stock markets.

Inflation: It hurts investors in fixed income instruments the most. Stocks are often considered a hedge against inflation.

Poor performance: What happens when you invest in a company that doesn't meet your expectations? Corporate risk comes into play when the company does not perform as well as you had hoped it would.

Market risk: Sometimes, regardless of how valuable your stock worth may be, the market may choose to completely ignore it and chase the next new arrival. A new technology or a new medicine may be a temporary craze with investors. Market value risk refers to the situation when the market turns against your picks.

The best way to beat it is to diversify across sectors and reduce the negative impact. Some investors perceive this as an opportunity to pick up value stocks at bargain rates.

Volatility: The relative rate at which the price of a security moves up and down is referred to as volatility. Volatile returns from markets adversely impact economic growth and investor enthusiasm. If the price of a stock moves up and down rapidly over short time periods, it is said to be high in volatility. Low volatility can be seen when the price almost never budges.

Managing risk

There is a two-fold approach to annihilating stock market risks to a large extent. Diversify across sectors. Putting all eggs in a basket may not be the right thing. Invest in the markets with a long-term perspective.

Irrespective of erratic market behavior and extreme volatility, the returns are stable and lucrative over the long term. Invest in worthy value picks across welldiversified asset classes and harvest stable returns over the long term.