Risk Involved in Share Market Investment.

Let us have a look on the composite risk involve in the market during operation:-

i. Interest rate
risk: This arises due to variability in the interest rates from time to time. A changes in the interest rates establishes an inverse relationship in the price of the security i.e. price of securities trends to move inversely with change in rate of interest.  Long term securities shows greater variability in compare to short term securities by this risk

ii. Purchasing power risk:

 It is also known as inflation risk and the inflation affect the purchasing power adversely. Inflation rates vary over time and changes unexpectedly causing erosion in the value of real return and expected return. Thus purchasing power risk is more in inflationary conditions especially in respect of bond and fixed income securities. It is not desirable to invest in such securities during inflationary situations. Purchasing power risk is however less in flexible income securities like equity shares or common stock where rise in dividend income off-sets increase in the rate of inflation and provides advantage of capital gain.

iii. Business risk:

 Business risk arises from sale and purchase of securities affected by business cycles, technological changes etc. Business cycles affect all types of securities viz. there is cheerful movement in boom due to bullish trend in stock price where as bearish trend in depression brings down fall in the prices of all types of securities. Therefore securities bearing flexible income affected more than the fixed rated securities during depression due to decline in their market price.

iv. Financial Risk:

This arises due to changes in the capital structure of the company. It is also known as leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt over equity in the capital structure of a company indicates that the company is highly geared even if the per capital earnings(EPS) of such company may be more. Because highly dependence on borrowings exposes to the risk of winding up for its inability to honor its commitments towards lenders and creditors. So the investors should be aware of this risk and portfolio manager should also be very careful.
By taking in to accounts of all the above factors, investment decision are taken in the share market.



Added By: Kajol,Name of Sweets