Risk and rewards are two products which travel side by side. And Risk is a part of investing. So, it become an important aspect to understand different types of risk an investor can face while investing and how to deals with risks involved and get succeed.
There can be many risks depends upon the behavior of investors and investments but here we are mainly covering some common risks and these are as follows:
1) Social/Political risk:
It is the risk that a country’s government will suddenly change its policies, It is mostly seen in emerging economies.
For this we are taking a recent example i.e., Demonetization.
On 8 November 2016 (20:15 IST), the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes. This was the sudden action taken by Government of India.
Now we will studies the Demonetization affect on various indices of the Indian share market.
Let’s start with:
|Date||Open||High||Low||Close||Shares Traded||Turnover (Cr)|
As the announcement made after closing of the market, so its effect clearly seen on next day opening price which is around 500 points below then closing price of 8th November 2016 and moreover there is huge increase in the turnover of 7020.8 Cr. And this increase in turnover is due to selling pressure on that day. So, it is important for an investor to check political risk, though this type of risk is bit unavoidable but investor need to handle and manage this risk properly in disciplined manner.
2) Taxability Risk:
It refers to the risk that a security that was issued with tax exempt status could potentially lose that status.
Finance minister Arun Jaitley, in his Union Budget 2018 Speech, re-introduced LTCG tax on stocks/mutual funds investments. Now Investor will have to pay 10% tax on profit exceeding Rs 1 Lakh made from sale of shares or equity mutual fund scheme held for over one year.
Earlier LTCG tax on stocks was scrapped in 2004-05 by then finance minister P Chidambaram.
These types of risk are unavoidable and investors need to adjust their investing criteria accordingly.
Source: Economics Times
If you have invested 1 Lakh rupees 3 years ago and now your total invested worth is 2.50 Lakhs rupees, then you have total of 1.5 Lakhs rupees profit and with the introduction of LTCG tax, now you have to pay 10% of 1.5 Lakhs rupees profit as tax, which is 15,000 of your profit is calculated as tax, earlier this LTCG tax was null since 2004-05. So investor also needs to keep them updated with these types of risks which may arise at any point of time and may impact investor’s overall profit.
3) Market Risk:
Market risk is a risk that will affect all securities in same manner. This is the risk that the value of your investment will fall due to market risk factors and it is caused by some factor that cannot be controlled by diversification and that affect the entire market.
Main types of Market risks are:
A) Equity Risk: Applies to an investment in shares.
The market price of shares varies all the time depending on demand and supply. Equity risk is the risk of loss because of a drop in the market price of shares.
B) Interest rate risk: Applies to debt investments such as bonds.
It is the risk of losing money because of a change in the interest rate.
For example, if the interest rate goes up, the market value of bonds will drop. Interest is inversely proportional to value of bonds.
C) Currency risk: Applies when you own foreign investments.
It is the risk of losing money because of a movement in the exchange rate.
For example, if the INR becomes less valuable relative to the USD, your Indian stocks will be worth less in USDs.
4) Regulatory Risk:
It is the risk that a change in laws and regulations will materially impact a security, business, sector or market. Changes in regulations can increase the cost of operating a business; reduce the attractiveness of an investment, change in cost-structures, etc.
The Maharashtra government had passed the resolution on July 12 to allow food inside movie theatres from August 1. Though it was a major relief for movie goers but a big hit on multiplexes as sales of food and beverages inside the multiplexes contributes a lot to the overall revenue.
Due to this, following the announcement, the stock of PVR Cinemas fell 13.47 per cent or 188 points to 1209 level whereas Inox Leisure fell 10.34 per cent or 25 points to 226 levels.
5) Concentration Risk:
This risk involved when your money is concentrated in 1 investment or type of investment or not able to diversify investments.
For example, you restrict yourself towards one kind of investment like in only one sector so if any case that stock not performing good then you may end up losing money.
But when you diversify your investments, you spread the risk over different types of investments, industries and geographic locations.
For Example: If investor bought 1000 shares of Vakrangee limited on 25 Jan 2018 at 505 prices having total value of INR 5, 05,000, but after nine months i.e., on 5 Nov 2018, share price remained only 22.50, which means value investment reduced to 22,500.
This is why concentration risk needs to be avoided and investment needs to be diversified so that investor will not face any kind of concentration risk in future.
So below is the price chart of Vakrangee Limited for Last one year and give us an idea that how it fall in last one year.
6) Delisting Risk:
It is an risk which any company can face from the side of regulator. In this risk, regulator can delist the company from trading if it is suspended from trading for more than 6 months.
Like in Recent scenario:
In a circular, the BSE said, “210 companies that have remained suspended for more than six months would be delisted from the platform of the exchange, with effect from 4 July, 2018 pursuant to order of the delisting committee of the exchange”
Under the compulsory delisting regulations, the delisted company, its whole-time directors, promoters and group firm would be debarred from accessing the securities market for ten years from the date of compulsory delisting.
For example: If you have invested in Arvind Remedies then you were into a great loss as it is one of the company which got delisted status from BSE in July 2018.
So it is always preferred to invest in Bluechips stocks rather than going for Z category stocks because it is important that stock should have enough volume so that trade can be settled easily.
Risk involved with real time Examples:
Now we will consider Suzlon Energy and will see how risk is associated with it and which leads to collapse of its stock.
Suzlon Energy Ltd is one of the leading renewable energy solution providers in the world and formally it was ranked fifth in the world. It is one of the world’s largest wind turbine suppliers.
But from last one year its share price collapse by almost 60%, main reason for this collapse is that it is heavily debt and almost over 99% of Promoter Stake is pledged and main reason for this heavy debt is its loss in FY18 (reported loss in FY18 was 389.18 Crore, whereas in FY17 profit was 899.89 Crore) and this loss was due to introduction of GST from 1 July 2017.
Introduction of GST -> Increase in Expense cost and no tax exemption -> Decrease in PAT -> already in debt and after GST filled with more debt -> Increment in pledging of promoter’s shares -> negative impact on stock price
This is how regulatory risk is involved if invested in Suzlon Energy.
How introduction of GST collapse Suzlon Energy:
The indirect tax bill is negative for companies like Suzlon as it will put pressure on developer margins and internal rate of return (IRR) could eventually force a decline in prices and realizations, up to 10 to 13 per cent as excise duty exemption and concessional rate of duty would not be applicable in GST regime.
The impact includes a 16-20 per cent rise in Solar off Grid costs; 12-16 per cent rise in Solar PV Grid installations and an 11-15 per cent jump in the cost of setting up wind energy projects. This ultimately leads to negative impact on profit and loss book in FY18. This created huge pressure on debt situation of company and ultimately leads to crashes down to its low levels of stock price.
Suzlon Energy was already hit by global crisis of 2008 when it was trading around 400 and now with introduction of GST made its journey become worst and now it is trading around 5 rupees.
With regulatory risk involvement this company touches its lowest share price ever, so understanding regulatory risk for future perspective is very important because it can impact any company to a great extent.
Risk plays an important role in success because it helps us in understating different factors responsible for achieving targets.
That’s why risk and rewards walks side by side each other.
In Investment perspective, understanding risk factor is very important because if you not able to make plans to avoid these risks then you may face losses in your investment so it become very important to understand each and every concept linked with your investments.
Above mentioned risks are few common risks which any investor can face while investing so understanding these risks and making proper plans to tackle these risks will be first priority for any investors.