Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Markets: Assessing risk... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 12, 2006

    Markets: Assessing risk...

    Prudent investing in equities requires an investor to assess the risks and rewards of a particular stock before arriving at an investment decision. Both risks and rewards are inseparable in the sense that one cannot exist without the other. While it is obvious that rewards easily capture the attention of an investor, proper assessment of risks is imperative as it provides a perspective on the likely 'downside' while investing in stocks.

    Risk is different from uncertainty, which cannot be quantified. Return is the reward you get for bearing risk. Risk is of two types viz., unsystemic risk and systemic risk. Unsystemic risk is the risk that is company specific like a strike or fire in a particular company. Systemic risk on the other hand is the risk that is associated with all the companies and sectors.

    Natural risks: Natural calamities can be summed up in a single word - 'unpredictable'. To cite an example, the SARS epidemic, the recent avian flu scare or the 9/11 terrorist attack were events, which affected nations across the globe. While these events did impact the economies of certain countries, they could not be foreseen and therefore 'factored' in. For example, in India itself, the floods in Mumbai (July 2005) affected the pharmaceutical sector as inventories were damaged leading to a dip in revenues. Also, these events generally tend to have a negative impact on the hotels and tourism sector.

    Economic and market risks: These risks are at the macroeconomic level such as inflation and interest rates. In recent times, inflationary concerns have led to a hike in interest rates as has been demonstrated by major central banks in the US, Europe and India. As far as the Indian stock markets are concerned, the Fed rate hike is likely to impact Foreign Institutional Investors (FIIs) inflows in the medium term. This means that companies, which have high levels of FII holdings, are likely to be impacted when there is an outflow of money. Similarly, with the rate hike by the Reserve Bank of India (RBI), manufacturing sectors like metals, auto, capital goods, textile and pharma that have acquired considerable debt in the recent past, will see a rise in their interest costs going forward. This might have an impact on their bottomline, which means that investors will have to tone down their earnings growth expectations.

    Political risks: Government policies affect the economy and financial markets in a big way. This was largely reflected in the energy sector wherein products such as kerosene, petrol and LPG were subsidised despite rising crude prices, consequently causing oil marketing companies to bleed. Similarly, the impending DPCO policy (for price control of drugs) looms like a dark cloud over the pharma sector.

    Sectoral risks: Every sector has risks, which are unique to that particular sector only. This is termed as unsystemic risk. For example, pharma companies competing in the global generics space face the risk of lower realisations due to fierce competition. Similarly, in the software sector, which is people-intensive, attrition and availability of skilled people assumes significant importance. Also forex risks are prevalent in companies, which focus largely on exports such as software, pharma and textiles and imports such as energy.

    To sum up...
    While systemic risks cannot be avoided, unsystemic or sectoral risks can be reduced by diversifying one's equity portfolio. This means that besides investing in different companies within the same sector, investors need to invest in stocks across sectors. At the end of the day, it is important to understand one's risk appetite and invest in companies with strong fundamentals from a long-term perspective.



    Equitymaster requests your view! Post a comment on "Markets: Assessing risk...". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)