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What Stocks Are Safe To Invest In – Investments in stocks are one of the best ways to generate wealth. A strategic investment plan and data-driven decisions can help any investor effectively achieve their long-term financial goals with stocks.
Every investment has some form of risk associated with it. The world of investing operates on a simple principle of risk versus reward: higher risk offers better potential for higher returns and vice versa.
What Stocks Are Safe To Invest In
Therefore, investments in stocks carry certain risks that all investors should be aware of. Today I will talk about the risks associated with investing in the stock market and how you can manage those risks efficiently.
What Are Stocks?
To manage risks in the stock market, you need to know what risks you will have to deal with.
First things first, as an investment vehicle, investing in stocks is risky. Although you can reduce the risks, it will not be as safe as a fixed deposit in a bank.
However, equity investments have historically outperformed investments in fixed deposits, gold, etc. If you plan your investments well, this can be a great way to put your hard-earned money to work hard to achieve your goals. Below are some of the risks associated with investing in the stock market:
The price of a stock is determined by the demand and supply of the said stock in the stock market. Hence, it fluctuates every day, and within the day as well. As an investor, you can buy stocks and make gains either through dividends declared by the company or by selling them at a higher price.
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However, when you need to sell the stock, if the price is low, you are vulnerable to holding losses. This is market risk.
Stock is a portion of ownership in a company. If the company experiences business problems, the stock price could decline. Most investors analyze the financial statements and management of a company before investing in its shares. Therefore, the problem there could lead to lower prices.
Since dividends are a good source of regular income in stocks, the solvency or liquidity of the company is crucial. A company with liquidity problems could cut its dividend or worse, find it difficult to pay its bills or repay its debts. This could have a negative impact on the company’s stock price.
I am referring to the tax laws that govern the company whose stock you purchased. The government continues to change tax rules based on the needs of the economy. If the sector you have invested in is adversely affected by any such tax laws, the share price could fall in no time.
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The government also changes interest rates on deposits and loans based on which direction the economy is headed. Thus, if interest rates increase, companies take out loans at higher interest rates which can reduce their profits and affect the stock price.
On the other hand, if interest rates fall too low, it is an indicator that the economy is slowing, and companies suffer losses as well. Hence, a balanced interest rate regime is healthy for stock markets.
Many sectors are subject to regulatory bodies. For example, medicines, tobacco, communications, etc. Any change made by the regulatory body could affect the business of all companies in the sectors resulting in lower prices.
Inflation is the overall increase in the prices of goods and products. When the inflation rate rises, companies have to spend more to buy the same amount of raw materials. A sudden rise in inflation rates can affect the profitability of companies, causing stock prices to fall.
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There are many other risks such as political risk, social risk, currency risk, etc. In simpler terms, there are many factors that can affect stock prices. Hence, the answer to the question – is investing in stocks safe depends on how these risks are managed.
This is the meaty part of the article. I will try to keep it simple and provide some actionable tips to help you manage stock market risks and provide an answer to the perennial question – Is investing in the stock market safe?
You may have heard this term a lot in almost all investment-related articles. Do you remember the saying “Don’t put all your eggs in one basket”? If you do this and the basket falls, all the eggs could break. The same applies to stock investments. If you invest a large portion of your money in shares of companies from a sector and the sector is going through difficult times, you could suffer huge losses.
Diversification is effective when you invest in stocks of companies that have no or low correlation with each other. In simpler terms, invest in market sectors in such a way that if one sector falls, the other does not automatically fall as well.
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Apart from diversifying across sectors, also make sure not to focus too much on large-cap, mid-cap or small-cap stocks alone. Invest in companies of different sizes to reduce the risks affecting any one sector.
Another good way to manage the risk of investing in stocks is to make sure you do good research on the company before purchasing its shares. Look at the company’s financials and evaluate whether they are healthy enough to weather the economic ups and downs. Fundamentally strong companies are also favored by investors who push prices higher.
Investors today have a lot of information available via news channels, blogs, online articles, etc. While every “expert” claims to help them earn tremendous returns, getting drawn into investing without doing proper research can backfire.
Also, during an economic slowdown or recession, panic can cause investors to make rash decisions that can lead to losses or increase the risk of a stock portfolio. Hence, it is important to ensure that you always make data-driven decisions and keep speculation at bay. Remember, investing in stocks is not gambling.
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Stock markets are inherently volatile. Therefore, if you own a portfolio of stocks, there may be times when you need to sell certain stocks and some new stocks must be purchased to improve returns. You can identify these opportunities if you track your investments regularly.
Every two weeks is fine but you can increase or decrease the frequency depending on the type of stocks you have invested in.
In theory, defensive stocks are those that belong to companies that sell basic goods and services. Think healthcare, grocery stores, etc. Regardless of the state of the economy, people will spend on these products/services.
Thus, while market fluctuations also affect them, the stock prices of these companies are relatively stable. Therefore, by ensuring that a portion of your investable pool is allocated to these stocks, you can reduce the overall risk of your investment portfolio.
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Even if you’re not looking at regular income in the form of dividends from your stock investments, companies that offer consistent, high dividends are solid companies.
Therefore, unless the dividend is cut, these stocks tend to perform better than others in the same sector. Hence, while investing in a particular sector or sector of the market, make sure to include high-dividend stocks as well.
Now that you have a clear idea about the risks associated with investing in stocks and the ways in which you can manage them, I would also like to highlight an important aspect that you should keep in mind while investing – always invest according to your risk tolerance.
Every investor is different and has a different level of risk tolerance. While someone may be willing to bet on a dark horse or take high risks with their investment for the opportunity to earn great returns, another person will be comfortable with lower returns as long as they take less risk.
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For example, if a person with low risk tolerance invests in penny stocks and the market goes down for a few days in a row, he or she can panic and sell the stock, resulting in a loss. However, an investor with a high risk tolerance is likely to retain the investment without panicking or deciding to sell sooner, thus minimizing his losses.
No matter the state of the market, instead of wondering if investing in stocks is safe right now, think about how you can make investing in stocks safer and maximize your returns.
Stocks mentioned in this article are not recommendations. Please do your own research and due diligence before investing. Investing in the stock market is subject to market risks, read all relevant documents carefully before investing. Please read the risk disclosure documents carefully before investing in shares of stocks, financial derivatives, mutual funds and/or other exchange-traded instruments. Since investments are subject to market risks and price fluctuation risks, there is no assurance or guarantee that investment objectives will be achieved. NBT does not guarantee any guaranteed returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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