What are the risks in the stock market? How to secure your investment?

Tue, Feb 15, 2022 6:17 AM on Stock Market, Recommended, Exclusive,

For many people, investing in stocks is a guaranteed source of income, and there is no risk, but only profit. Therefore, when any company issues shares, there seems to be an unprecedented crowd of buyers. Even the government has made a policy of arranging a reservation for local and employee groups as if the only basis of 'prosperity' and prosperity is nothing but share investment. In this way, the government conveys that shares are not readily available, and without claims, one cannot prosper.

Even the departmental ministers openly call on those with shares in the hydropower company to make a son-in-law and invest in shares. Theoretically, investing in stocks is the riskiest sector. 

Investment and risk in shares

Any business is risky, and the investor receives dividends as a return for bearing and managing the same risk. The company is listed on the stock exchange, and the issue of shares at a premium price also adds price risk. This is a market-created risk. The risk created by the stock market is greater than the business and managerial risk of the company. Therefore, investing in stocks and stock market profits are considered high risk globally.

Of course, such risk is associated with returns. It encourages investors to take risks while making the stock market volatile and creating capital gains or losses. In the literal sense of the word, investing in stocks is about earning and losing.

  1. Professional and managerial risk of the company: Along with the purchase of shares of any company, it also accepts the responsibility of operating and managing the company as a shareholder, which is fulfilled through some operators or professional management groups. Thus, even if there is no direct participation in the operation and management, the proportion of shares held by the shareholders has to bear the business and managerial risks and profit and loss, such as fluctuations of business of the company policy decisions.
  2. Risk of price fluctuations: The risk of price fluctuations is created in the stock market. Of course, the price risk is lower in stocks bought at face value but not zero. For example, the share price of Divyeshwari, Khanikhola, and other companies has a face value of Rs.100 but they also went less than their face value price. The net worth of most of these companies is still negative.

In the past, the share prices of many development banks and financial institutions had fallen far below their face value. The share price is determined by the demand and supply of shares of the company in the market based on the company's financial condition, management, past dividend rate, current earnings per share and probable condition, future business condition of the company, etc. But the stock's market price can go up and down quickly due to the general perception of the company and many other things. Therefore, investors have to bear capital gains or losses as they risk fluctuations in this price.

  1. Policy risk: The policy of the government and the regulatory body towards the invested company and the commodities and services it provides has a significant impact on the trading business of the company as well as the stock market. Every time a new government is formed and the policy arrangements brought by the National Bank, Insurance Committee, and Securities Board, the business capacity of the company and the share market have been affected to some extent. Despite the government's priorities in the hydropower sector, there is a lack of regulation and confusion over the status of the project and the company after the license of the power project expires.
  2. Other risks: The personal investment habits of investors and traders are also creating additional hazards. When Nepal's stock market is guided by information and rumors rather than financial indicators, the risk increases, and the market goes up and down without any reason. Exclusive access to data inside a limited number of individuals and organizations is the most significant risk. It unnaturally benefits the limited number of people by obtaining company and policy information in advance and creating favorable conditions.

It is pertinent to recall here the incident in which 960,000 Bengalis lost their ancestral property due to the sharp fluctuations in the share market of Bangladesh in 2010/11. Even now, 20 percent of particular reservations have been given to the Bengalis in any share issued there. However, the pain of 11 years ago has not been compensated. It should not be forgotten that a similar crisis occurred in the Chinese stock market in 2015/16. Every year, small and big crises like the one in Bangladesh and China in the stock market worldwide, the phenomenon of homelessness is repeated like every year.

Share Reservation and Risk Transfer

The government and investors have considered the company's initial public offering (IPO) at face value to raise capital as risk-free. Yes, it reduces the risk of cost overruns. All investors buy shares at face value. Even so, owning one is still beyond the average person's reach. Each investor must bear such risk collectively in proportion to the shares he holds.

Purchasing shares does not simply guarantee a return, and it carries risk. However, ignoring this thoroughly, it is the duty and right of the locals to invest in hydropower and manufacturing companies. In addition, residents and employees affected by the industry or project are attracted by the arrangement of reservation or preference in the shares to be issued.

Paragraph 3, Rule 9, Sub-rule 4 of the Securities Issuance and Registration Rules, 2073, states that an organization can allocate up to ten percent of its issued capital to sell shares to the residents of the industry project-affected areas. The claims distributed to the residents of the affected areas will not be dealt with or transferred to anyone else until three years have elapsed from the date of distribution of the publicly issued shares. 

Legal reservations may be appropriate when the return on investment is guaranteed. Still, some risk is added no matter how guaranteed the investment in shares may be. Moreover, forcing locals to take risks for up to three years under reservation and property security pretexts may be wrong.

While the government is shouting slogans of prosperity through investment in shares, it should not forget that it is transferring risk to the locals. If the company wants to prosper, then the government or the company should provide a buyback guarantee and alternative measures for risk management if the company goes into deficit. The market price is lower than the face value in the stock market.

Risk Analysis and Management

Before buying shares of any company, the mentioned risks should be studied and analyzed. The shares at face value may have relatively low-price risk, but none are wager-free. The habit of investing and doing business without study and analysis poses a significant risk. 

Each person's risk-taking, analysis, and risk management ability differs, affected by access to information, investment duration, purpose, expected return, investment, and source of alternative funds. But investors do not assess their risk-bearing capacity, nor are they prepared for risk management. There is a tendency to invest based on rumors without knowing how much risk to seek and how to manage the risk that may arise due to various reasons.

Even companies, regulators, and governments do not consider it necessary to raise awareness about the potential risk and risk management measures about the issue of shares or the market. Primarily when an IPO is issued at face value, we are inclined to invest without understanding the business potential and risk of the company. We rush to buy and sell shares in the stock market as soon as they are below average. In this way, along with the risks created by the company and the market, we are causing more trouble due to personal investment behavior.

In addition, the nature of the risk may vary depending on the company's business situation or the stock market. Technical tools can be used to analyze the fundamental aspects of a company such as business condition, management, and management group, policy and legal system, financial situation and indicators, natural and technical elements, and demand and supply condition of the company's stock in the stock market. Similarly, based on the duration and purpose of the investment, average cost management, loss management, or profit loss (stop loss or profit book) measures have to be adopted. In addition, the investment has to be transferred from one company to another in some cases.

When investing in stocks as a whole and buying and selling in the stock market, investing or trading with analysis taking into account the risks involved, the financial condition of the company, the economic, social, and political situation of the country, as well as the dangers it can bear will be an empirical formula of risk management. The stock market is risky, and there is profit or loss due to chance. Therefore, you should only trade by analyzing your risk-bearing capacity.

Investing in reservations or face value, at a much lower price than in the past, without risk analysis and management preparation because the company is paying a premium, is more likely to turn all investments into ashes than profits. That is why the bones should be swallowed only by looking at the neck, as the older adults said.

Written by GP Chudal

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