This is a guest post by Kevin Chong, from Johor Bharu, Malaysia. He is a newbie in stock market investment. You can visit his blog about technology at http://handphones.myblog2day.com
What is risk ?
Risk is the probability that an investment’s actual return will be different than expected.
This includes the possibility of losing some or all of the original investment.
Some regard a calculation of the standard deviation of the historical returns or average returns of a specific investment as providing some historical measure of risk.
Financial risk is market-dependent, determined by numerous market factors, or operational etc.
Nowadays, many people lose money in the stock market. Why is this happening? It is because they don’t know how to control the existence of potential risk of investment. Therefore, it will make you lose money and feel hard to earn money from the stock market.
We must know that all investment activities will include some form of risk, such as losing money, stock risk, and market risk and so on. Although, I am still a newbie in stock market, but I have learned all golden investment rules from Warren Edward Buffet, and a local famous stock Teacher Lee Xin Hong. Both of them are my admired idols and teachers. I also have gained two years of experience by investing directly in the stock market.
Investing in stock is not an easy job, because we must always do all the research to assess the potential of a listed company, as well as the market condition too. If you don’t understand all the related facts about a company, it may cause you to lose all your money. It’s true.
Here are the 10 important risks you must know before putting your money into the stock market.
Letâ€™s go through all the type of investment risksï¼š
1. Mismatch Risk: Trade the wrong investment product and it doesnâ€™t suit your budget plan.
e.g : Budget Plan : RM5,000; The stock you bought : RM5,500
2. Inflation Risk: Return of investment (ROI) is less than the market inflation rate.
e.g. Return of investment (ROI) : 5%; Market Inflation rate (IR) : 8.5%
3. Interest Rate Risk: The change of interest rate may decrease the return of investment.
e.g. current interest rate : 2.0 %; Interest rate of the time you bought it : 3.5%
4. Market Risk: Stock market goes up and down according to the market trend, meaning that your return of investment can increase or decrease at such a time.
e.g Current stock price : 0.500; Bought price : 0.470 ( may goes up or down )
5. Market Timing Risk: Trade without knowing the market trend, for example: Current trend is a downtrend. That means that youâ€™ve enter at the wrong time to buy stock. You must always buy during uptrend.
6. Non-diversification Risk: Don’t put all your eggs in one basket
e.g. Cash on hand: RM5,000, put all money in the stock market. You should diversify into fixed-deposit RM 2,500, stock market: RM2,500. If you lose money, you still have RM2,500 on hand.
7. Liquidity Risk: When you want to sell the stock you are currently holding, there is nobody there to buy your stock, meaning that there is no volume in that stock.
8. Gearing Risk: You borrow money from bank or friends to invest. If you lose money, you are unable to cover all the losses.
9. Legislative Risk: The change of investment bank rules may affect your investment plan.
10. Personal risk: scare and greedy. Warren Buffet once said, â€œWe simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. This is the method of reverse investment in stock market.
Finally, if you are a newbie to the stock market just like me, I will strongly encourage you to adopt a long-term investment plan with a small token to gain some experience first, make sure you are familiar with it. Donâ€™t ever test water with both feet. And, always remember that you are either you a winner, or a loser in the stock market.
If you have any question, feel free to comment here or contact me at JunXi_1988@hotmail.com