Through equity investment there is the possibility to increase the value of the principal amount invested in the form of capital gains and dividends. Equally there are risks as well. Market risks impact equity investments directly. Stocks will often rise or fall in value based on market forces. As a result, investors can lose some or all of their investment due to market risk. Before Investing into Equity, there is need to understand the Risk involved into as some of below as:
Economy risk: The country’s economy plays a vital role in performance of financial instruments. The economic risk includes growth of the country, inflation, interest rates, balance of payment etc. Any hindrance, policies in any of the sector will directly impact the financial status of the country. This will have direct impact on the company performance, indirectly hitting your shares and your money. So, one has to keep eye on the economy and all developments associated.
Credit Risk: It is also very important that how the company manages its finances. Its equity-debt ratio. Leverage Ratio. If the company is highly leveraged than there are chances of not meeting liabilities and getting default.
Foreign Exchange Currency Risk: Most of the company’s revenue is dependent from outside country especially software and import-export companies who are mainly dependent on the exchange rate. Any fluctuations in currency will direct impact the company profit and shares. So, people with such exposure can enter into futures and option where they can minimize their losses by hedging.
Liquidity (On a/c of Broker) Risk: Though all the Pay In & Pay out fund to client end are as per SEBI norms (Normally T+2 system), Seeing some current circumstances Client fund may stuck if broker defaults.
Political risk: It is evident that if country’s political leadership changes or political instability happens, the return of the company may suffer, it effects on the bottom-line of the company.Industry level Risk: All industries face cyclical growth. So, one should examine the previous performance of the industry to know whether the company is in growth phase of decline phase and invest accordingly. Any new industry specific news will also hamper the stocks of the company.