Understanding Risk in Stock Market Investing

Hello, I am Umesh Tripathi, and we are learning the concepts of Fundamental Analysis. 
In this video, we are going to study about the risks associated with stock market investing.
Basically, there are different types of risks that are associated with stock market investing, and we need to be aware of those. 
Because if we know what kind of risk is associated with my decision-making, then I will be able to clearly strategize and come to a certain decision.

So, at any given point of time, our market moves in a certain direction. 
The market could be moving in an upward direction, or it could be moving in a downward direction, or it could be moving within a certain range or boundary. 
Now, in all these three situations, there are several types of risks associated with them. 
Because of these risks, generally, we investors end up facing losses. 

For example, let’s say due to certain geopolitical conditions, our market especially the Indian stock market witnesses a sharp downfall. 
If we have invested in a certain stock, that particular stock gets heavily impacted. 
From my buying price, the stock falls 15–20%. 
So, in such a situation, it brings a loss for me because due to this geopolitical situation, not only did the stock market witness a sudden crash, but certain stocks in my portfolio also faced a crash. 

So, whether it’s economic downturns, geopolitical situations, elections, or even global crises all such situations impact our portfolio. 
And these are basically the different kinds of market risks associated with investing. 

For example, take COVID. 
In 2020, when the news about COVID started coming in, what happened in the month of March? 
All of a sudden, within just a few days, we witnessed sharp corrections in the stock market. 
And in no time, the market crashed by around 38%. 
So, situations like COVID, or natural calamities, or any sudden big impact on the market — all these come under market risk. 

So basically, market risks are associated with our investments, and we need to be mindful of them. 

Along with this, there are certain business risks which are associated too. 
And these business risks are mostly linked to particular companies. 

For example, there’s a company that operates in a certain business domain. 
Now, suddenly there is a drop in demand in that domain, and sales start declining. 
In such a case, by the next quarter, the company’s financials will start degrading. 
So, with the company’s performance going down, if I have invested in it, my investment will also be impacted. 

Therefore, we must pay attention to such business-related risks as well. 

Now, this was an example of a certain company or business. 
Suppose a banking crisis occurs. 
If a banking crisis happens, it will impact almost all banks. 
So, there are some business risks that not only affect specific companies but the entire ecosystem or sector/industry as a whole. 

Along with that, liquidity risk is also a major risk for investors. 
Let’s take a simple scenario suppose I invested in a company whose stock price was ₹15. 
I thought, “It’s a ₹15 stock; not much to lose,” and I invested in it. 
After a certain time, I realize I am sitting on a gain  the stock has gone up to ₹35. 
Now, at ₹35, I feel like selling it. 
But when I go to the market to sell, I don’t find any buyers. 

In such a situation, I’m facing a liquidity issue in that particular company. 
So, even though I’m sitting on profit, I’m not finding any buyers to whom I can sell. 

Basically, penny stocks or low-volume stocks  where trading happens in very small volumes  can bring liquidity risk for us. 
Especially stocks listed in the SME (Small and Medium Enterprises) segment such issues are quite common there. 

Along with that, taxability issues are also one of the main concerns for investors due to changing tax rules. 
There can be certain situations where you are invested in some companies, and the local government introduces a new rule where you have to pay certain taxes on your dividend income or on your gains  whether long-term or short-term. 

We recently saw that our LTCG (Long-Term Capital Gains) and STCG Short-Term Capital Gains taxes were changed. 
LTCG  Long Term Capital Gains tax was introduced for the first time in 2018. 
And even though we were holding our stocks for a long-term duration 2 years, 3 years, 4 years we now have to pay LTCG taxes when selling those stocks. 
Moreover, it’s around 12.5%. 
So, after ₹1.25 lakh of profit, we have to pay LTCG tax on the remaining profit. 

So, different kinds of taxation changes even dividend taxation changes  bring taxability risk. 

Along with this, interest rate risk is also associated with the market. 
Many times, situations arise when the RBI either cuts or increases repo rates. 

Recently, the RBI reduced repo rates by 50 basis points. 
Now, what happens is when repo rates are cut, lower interest rates make borrowing cheaper, spending increases, and market participation rises. 
This brings a positive sentiment for the stock market. 

But on the contrary, if the repo rate is increased, higher interest rates make borrowing expensive. 
In such cases, people take fewer loans, home loans reduce, and demand for products starts to fall. 
This eventually impacts stocks and the stock market as well. 

Moreover, interest rate risks are mostly associated with the banking or real estate sector. 

Along with that, regulatory risks are also associated with stock market investing. 
For example, recently we saw that some Chinese apps were banned. 
Now, if we had invested in companies that were directly or indirectly associated with those apps or companies, obviously those stocks would be impacted. 

So basically, whenever certain laws change or regulatory declarations are made, they also impact the stock market. 

Along with that, inflationary risk is also associated with overall stock market investing. 
What happens is rising inflation erodes overall investment returns. 

Suppose there’s a product in the FMCG sector. 
Six months ago, its price was ₹100, and now the price is ₹105 or ₹110. 
So, during these six months, due to rising inflation, we’ve seen price impact on that product. 
In such a case, demand may fall resulting in revenue decline and profit margins may also shrink because of higher prices. 

So, these are mostly the risks associated with stock market investing. 

And no matter what kind of risk it is, risk is an inherent part of investing. 
So, we have to live with risk and take calculated risks so that we can mitigate the impact on our portfolio in the long-term investment horizon basically by diversifying our portfolio. 

So, be aware, don’t be afraid informed investing for the long term wins. 

That’s all in this video. 
See you in the next one. 

Investments and securities markets are subject to market risks. Read all related documents carefully before investing.