Risk is an inevitable part of any investment, but the extent of risk, whether large or small, depends on the type of product.
Investing in stocks involves a certain level of risk, which may be related to current economic conditions, a company’s performance and stability, or to market price factors.
By having a better understanding of the nature of the market, investors can mitigate risk if investments are made with caution.
The performance and financial health of companies can be interrupted by economic downturns – whether it is the global financial crisis of 2007-9, the Greek debt debacle of 2009-19 or the current economic difficulties induced by Covid.
Businesses could experience financial problems, incur losses or face a temporary shutdown, or even bankruptcy in some cases.
During these times, stock prices may fall as investors concerned about the company collapsing try to sell their shares to avoid further financial losses. New investments could also be temporarily suspended, as savings could be diverted to reserved capital to meet daily needs.
Instability in business operations
A company’s performance is not always stable – it can be strong, weak, or simply inactive depending on the economic climate, internal business operations, and other positive or negative external factors that could have a direct impact on its business.
A fall in a company’s share price or bankruptcy would make investors’ situation worse. If bankruptcy is declared, common shareholders will be the last to receive their assets. In some cases, they may receive nothing at all if the business has significant debts.
Growth in interest rates
The weight of heavy debt resulting from the rise in interest rates could adversely affect the profitability of certain companies, thus impacting the distribution of dividends to shareholders, and this could possibly impact the value of a company’s share price. in the stock market.
Illiquidity of shares
Liquidity refers to the ease of selling, buying and converting stocks into cash. The liquidity of a stock is important because it gives investors the flexibility to avoid risk. For example, if investors wish to exit the market due to the fall in stocks or are in dire need of money for personal use, they can sell their stocks.
Conversely, the illiquidity of stocks makes it difficult for them to sell their stocks quickly at an attractive price.
Fluctuations in share prices
A sudden change in stock prices can put investors in a precarious position. Such a movement occurs as a result of the supply and demand for a particular stock in the market or as a result of market manipulation.
The share price of a particular stock will increase if demand increases; conversely, it will fall if supply is greater than demand. In such a case, if investors fail to grasp the market trend, they may incur losses if they sell their shares below the market price.
Unscrupulous investors or traders can manipulate the market by raising, removing or maintaining the price of a particular stock for their own financial gain, which could result in losses for other investors if they are not careful. .
What should investors do to reduce these risks?
The popular investment mantra “don’t put all your eggs in one basket” is a clear signal to investors to diversify their portfolios or investments by investing in stocks from different sectors in order to avoid colossal losses if the country of your investments had to face an unexpected economic crisis.
If investments are badly affected if a country falls into crisis, investors can rely on stocks invested in other sectors that are not affected to make profits.
In addition to investing in companies from different industries, investors may also consider investing in different types of companies with different market capitalizations, as larger and smaller companies have different levels of risk and return.
As business operations vary from company to company, some crises can affect some companies while leaving others completely isolated. A good example is the thriving e-commerce industry during the Covid-19 pandemic compared to many other industries facing challenges.
Choosing the right actions
Investors should critically analyze the following factors before making an investment decision: growth potential, cash flow, income and profit of a company, its long-term strategies, quality of company, stock price history and stock liquidity. These factors can help investors determine the sustainability of a company’s operations and earnings.
Investors should also consider companies that pledge to distribute dividends regularly so that investors can earn regular dividend income even if stock prices fall during tough times.
Investors should also consult their brokers to gain sufficient knowledge about a particular security before investing.
Types of investors and equity liquidity
While there are advantages to the liquidity of stocks, investors also need to understand what kind of investor they are – whether they are long-term or short-term investors, or novice investors or investors. professionals.
As long as a business is growing, liquidity is not the primary goal of long-term investors. However, it is aimed at short-term investors as their profits depend primarily on capital gains from day trading.
Unlike those who are experienced in investing and can benefit from stocks with high liquidity, the new investor with limited knowledge should buy stocks with an average level of liquidity – stocks that need a certain time to be executed, as opposed to high liquidity ones which can be executed immediately. .
A novice investor is then in a better position to learn about market movements and avoid sharp price fluctuations which could make it worse.
Think before you invest
A fluctuation in stock prices is largely influenced by supply and demand, but investors should also carefully observe whether it is caused by investor sentiment or company fundamentals, such as its cash flow, liabilities. and its growth prospects.
A price change can also be caused by market manipulation, whereby unscrupulous investors attempt to deceive by falsifying information to deceive the price of shares in order to generate profits for themselves.
Investors should carefully consider what triggered a price change before making the decision to buy or sell.
For example, if a company’s stock price suddenly skyrockets without any positive news about the company, investors should be cautious.
Investors are recommended to follow the latest financial news – related to the economy, company operations and market movements – from reputable media channels to ensure that investments are based on solid facts. .
In addition, to promote transparent and fair trading, the stock market, as well as securities regulators, can initiate appropriate strategies so that investors can invest safely in the market.
Contribution from: The Cambodia Securities Exchange,
Market Operations Department
E-mail: [email protected]
Phone: 023 95 88 88/023 95 88 85
Disclaimer: This article has been written for informational and educational purposes only. It is not intended to offer recommendations or to serve as investment advice. The Cambodia Stock Exchange is not responsible for any loss or damage caused by its use in this manner.