4 Different Types of Stock Market Risk

The first thing that most people think about when they hear the term "equity investment" is the high level of risk it comes with. But the world of investments is such that the returns potential is highly correlated to the risk level. Equity, being the most reward-potential asset class, also comes with the highest level of risk.Do you know what these risks are? Take a look at the top 4-

The overall economy of the country has a significant impact on its stock market . Factors like economic growth, interest rates, inflation, etc., are crucial for the wellbeing of the equity markets.A country's economic state will mostly impact the financial performance of businesses within the country. If the performance of the company you've invested in suffers, it will ultimately increase the risk level of your investment.

Changes in policies by the government can impact sectors. For instance, the banking sector can get impacted if the government announces an unfavourable policy for banks. This could impact the performance of banks negatively and hence its valuation.

Even within a sector that is witnessing record growth, it is not necessary that every company will display similar results.A company's performance depends on many different factors, such as its finances, debt, growth prospects, management, etc. If there is a particular sector you’re interested in, compare some of the top performers from the sector based on these factors to choose the best.

Another common stock market risk is the exchange rate risk. The revenue of several businesses, especially ones belonging to the IT and import-export sector, abundantly depend on other countries.If a foreign country is involved, there will also be an exchange rate risk. Any kind of fluctuation in the exchange rate can impact the revenue of a company that you might have invested in. While there is no way to predict the fluctuations in the exchange rate, investors generally hedge their positions in such cases.

Every investment portfolio should be created after considering the investment risk and your individual risk-taking capacity.If you are unable to assess risks on your own, consider professional help as any investment without adequate risk management could result in significant losses.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.