Tuesday, August 6, 2013

RISK TAKING

A Child while trying to walk fall down, A boy or girl while trying to learn Bi-cycle fall down in the Ground. Both incidents are common to all people. With fear stepping no attempts none can’t learn anything.

Similar to above, stock market risk can also be said as the same. A person after calculating the Entire risk, with the Depth of risk, by carefully attempting can overcome the risks favorable to them for a successful person.   
                                            
You have said simply. But day-by-day the sensex rising and lowering, about 100 and more points, creates fear. 
                                                                            
In Vegetable market while the price hike of Onion, we used to buy very small quantity , similarly after falling of prices we buy in large quantity required for us. See how intelligently we are facing the situation ? Similarly for stock investment also the following methods can be applied ! 

There are 3 types of risks. They are,

1.Interest rate risk
2.Company risk and
3.Market risk

For vegetable price hike :-  

1. Flood
2. Famine
3. Supply
4. Demand , the following reasons can be said, 

Likewise for stock prices hike :-

1. Supply
2. Demand
3. Money flow
4. Interest rate fluctuation
5. World Economic position
6. Government
7. Rules and Regulations etc
     and several other factors are also found. 

If you were an short term investor you can be feared of these factors. Day-by-day fluctuations of sensex are not based upon 
1. Economic growth
2. Companies accounts statements

Or some other Long term based criteria’s. So, Long term investors need not be worried of those short term risks. Investing in fair stocks for long term may reduce the risk considerably.

Your investment pattern if being below than 5 years can be choosed as R.D or Fixed Deposits. More than 5 years leaving your investment, can be invested in stock market. 
                     
While investing in stock market, stocks of Sensex or Nifty, the risk containing is low. In moderate ( based on market capitalization ) companies risk may be more, the gain also being more.

In small scale companies the risk will be large, gains also may be large. While starting the investment Large capitalization organizations can be chosen.   
                                              
Another important risk is the Broker. Persons who are interacting with you , must be honest and noble. Moreover the stocks bought by us are being kept safely, or without our permission stocks bought / sold must be investigated. 
                                     
How things happening in America affect our stock market ? Our Indian Economy globalizes with World Economy. Investors investing in one stock market, and changing to another, for various reasons is found casually happening incident now-a-days.

Since based on computerized Technology it is possible for anyone to transfer several billions, from India to any other country stock exchanges within few seconds. Due to the sudden changes ups and downs are happening in our stock market.

While compared to America, Japan ,Europe our stock market depth is low. Due to the changes our market may oscillate somewhat speedy.      
                                    
As already told, people able to leave their investment for more than 5 years can invest in Long term stocks of quality organizations. Some may think shortly either by 

1. Mortgaging or by  
2. Borrowing  Money  can be invested in stock market ? 

Since the stock market growth can’t be pre-defined, assured, anything may happen. Only it can be presumed. Supposing, after collecting money by Mortgaging or by Borrowing and investing in stock market, an untoward position may even partially or fully squander the invested amount. So these type of actions need not be attempted in any manner. 
                   
Some people may be possible with surplus amount such as Retirement P.F amount willing to invest. A Formula is prevailing for them can be applied as, 
                                  Investment = 100 ─  Present Age ( If your age is 51 ) 
                                                     = 100 ─ 51  
                                                     =  49.  
Only that percentage alone can be invested.

There are 3 types of Investors. They are,

1.Conservative             Unwilling to take high risks; happy with reasonable returns.

2.Aggressive                Willing to take calculated risks; wants high returns.

3.Speculative                Can take any risk; looks for extraordinary gains. 

People being in the above categories, depending upon their mentality and risk taking capacities their rewards may also be like this given below. They are,

Low risk takers             They should invest in Blue chips and aim at Long term gain ( 3                                                         years and above ) only. They should adopt a buy and Hold                                                                 Strategy.     

Medium risk takers       They should invest in growth stocks and aim at medium term                                                             gain ( 1 - 3 years ) They should adopt a reasonably aggressive                                         Strategy.     

High risk takers             They should invest in turnaround stocks and aim at short term                                                           gain only ( around 1 year ) Adopting a very bold Investment                                                               Strategy they should also go bargain Hunting.
           
Generally if there is no risk , no growth can be obtained.  
Firstly, there is liquidity risk. Because it is new shares in a company, you have no idea how the market see such shares. There might not be a lot of trading activity after the initial euphoria and you might have a difficult time to get rid of your cash in case you need. 
Then you have all the other risks like corporate fraud risk, litigation risks and so on. 
Risk vs Return
There are risks involved in any investment - risks that the return will be lower than expected and risks that some or all of the money invested (the capital) will not come back.
Investing is always subject to one fundamental principle - the higher the risk, the higher the return (and vice versa). Some forms of investment, like bank deposits, are widely recognised as low risk but they usually give lower returns. Generally speaking, shares are higher-risk than deposits, debt securities and property. But they also offer the prospect of much higher returns, especially over the longer term.
The risks in share investing are closely linked to all the uncertainties that exist around businesses and the profitability of companies, now and in the future. Some companies - especially those with established businesses and steady profits from year to year - involve far less risk than others (although returns tend to be lower as well).
The risks can be reduced by taking the view of investing for the long term, selecting shares carefully and spreading investment across different types of companies (the process of "diversification"). NZX's regulatory framework also helps reduce risks that could arise from a lack of information, poor conduct by companies or share trading irregularities, by providing rules which all market participants must adhere to.
While history shows that share prices will rise over time, there are no guarantees - especially when it comes to individual companies. Unlike debt securities, which promise a payout at the end of a specified period plus interest along the way, returns from shares come from dividends companies pay out of their profits, and capital appreciation of the shares through a rising share price. Neither of these can be guaranteed.
The worst-case scenario is that a company goes bankrupt and the value of your investment evaporates altogether. Happily, that's rare. More often, a company will run into short-term problems that depress the price of its shares for what can seem like an agonisingly long period of time.
In investing, risk is the chance you take that the returns on a particular investment may vary. Because of the increased uncertainty of returns, investors will, all other things being equal, require a higher return if they take on more risk.
For all the risk, however, there are ways to manage your exposure. The best is to diversify by owning a variety of shares and other investment products, such as debt securities. That way, no single company can endanger your savings. It's also important to remember that investors are well compensated for taking the risk with shares. Historically, the long-term return from shares is much higher than for debt securities, which are less risky. Over time, that spread can make a huge difference in the earning power of your savings.
So you'd like to make a fortune in the sharemarket? Who wouldn't? The first thing you need to understand, before you phone a broker or commit a cent to a portfolio, is that it's impossible to realise a return on any investment without facing a certain degree of risk.
No matter what you decide to do with your savings and investments, your money will always face some risk. You could stash your cash under your mattress or in a piggy bank, but then you'd face the risk of losing it all if your house burnt down. You could deposit your money in the bank, but the buying power of your savings would barely keep up with inflation over the years, leaving you with possibly less dollars in real terms than when you started. Investing in shares, debt securities, or mutual funds carries risk of varying degrees.
The second fact you need to face is that in order to receive an increased return from your investment portfolio, you need to accept an increased amount of risk. Keeping your money in a savings account reduces your risk, but it also reduces your potential reward.


While risk in your investment portfolio may be unavoidable, it is manageable. The riddle of controlling risk and return is that you need to maximise the returns and minimise the risk. When you do this, you ensure that you'll make enough return on your investment, with an acceptable amount of risk.
So, what constitutes acceptable risk? It's different for every person. A good rule of thumb followed by many investors is that you shouldn't wake up in the middle of the night worrying about your portfolio. If your investments are causing you too much anxiety, it's time to reconsider how you're investing, and sell those securities that are keeping you awake at night in favour of investments that are a little less painful. When you find your own comfort zone, you'll know your personal risk tolerance - the amount of risk you are willing to tolerate in order to achieve your financial goals. 

I was wondering, what are the risks besides never seeing the money you invested in a stock market? Is there any way you all of the sudden have to owe money? Lets say i gather a few friends and we pich in some money and invest that into a stock market, i will be the shareholder, we can gain money by havning the company making gains or we can loose, and never see the money again, but can we get into dept? 

Stock market is affected by various factors. Earlier political, economical and social factors controlled the market. Now even global factors and inflation etc do affect share market.

Common stocks in limited companies give you no way to be into debt. But the process of buying stocks, as in leveraged buying, can clearly leave you in debt. 
Short selling (ANOTHER FORM OF LEVERAGE) can also leave you in debt.

In some markets, income trusts, a form of stock, can leave you in debt, if the income trust pays out too much in distributions and the income trust then folds short of its debts.

If you become a company director, you can become liable for failure to exercise your fiduciary responsibility, but this is not a direct result of owning stock.
If you simply buy shares of stock, there is no risk of owing money. Buying on margin means you borrow money from the broker to buy additional shares, so you then owe your broker money and must pay interest on it. You hope that the stock prices go up, but if they don't, your shares can be sold by the broker without your permission. And even if the stock price goes up, you have to pay the interest on the borrowed funds. All expenses take away your investment results, so don't incur unnecessary expenses.

So, stay away from buying on margin.

If you sell stocks short, and their price goes up, you can wind up needing to borrow money to buy the shares of stock you already sold. So, stay away from short selling.

However, if you and some friends get together and buy stock together, there is a big risk that somebody will be unhappy at some point in time. They may force you to sell the stock at a bad time, because they need the money. If you're the shareholder, you run the risk of being sued due to some misunderstanding.

This risk is hasn't been addressed by previous answerers, but given human nature, it's the most dangerous risk you are contemplating (beyond just losing money on the stock, of course).

I suggest that all of you buy your own shares of stock, though of course you can have some sort of club where you meet and research them together and so on. But let everybody have their own personal brokerage accounts, so they are responsible for their own money.
There can be many risks like you can loose some amount of ur investment even you can go in debt but.........but...........
The flip-side of this is you can make a lot of money if you invest in the right company.

These risks can be avoided if you educate yourself and then enter into this market . First three months only watch how the markets go , how it reacts? be in touch with every days performance , read a lot about the market , try to learn its basics and last but not the least start investing in a systematic manner and keep an eye on ur stocks then dear I am pretty sure you will forget about such risks of stock market.
To put it briefly; there are two main risks you would be faced with. Which are "systemic risk" and "unsystemic risk".

The first type kicks in as soon as you enter the stock market with the purchase of your first stock; as it pertains to factors affecting the whole market. And then you also take on the second risk which would pertain to the specific company shares you have purchased.
There are situations in which you can go into such conditions. Most of the brokers allow you to trade on margins. With this you can trade fro 5-6 times higher than the actual amount in your bank account. When the trading completes and if u are under a deep loss, then u have to return back the money.
Although this can happen, Most of the online brokers already have safeguarded the traders - they do have an automatic square off system if the loss level crosses a threshold - say more that 5% in intraday

Short answer is no. As long as you do not buy on margins (where you do not pay the full amount), you can only lose the amount you put in. This is extremly rare as you would have enough notice to sell and recover some amount. 

There are several ways you can track the performance of your shares online and make decisions to buy or sell.
Investing in shares are risky as it will depend on the various conditions below.

Companies Business, Market Conditions, Global Market Conditions, Terror, Politics, GDP, IIP nos., Inflation, Company management, Government policies, etc.
The risk of common shares can be disaggregated into three components. Identify and briefly describe each of these three? 

If anyone can assist I will be much appreciative......It seem like I have searched everywhere and cannot even get a start. I am thinking though that they are asset, equity, and liability.         

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