Risk management is the process of identifying risks, analyzing them and taking adequate measures to curb these risks to achieve the desired results. The term financial risk management is most often associated with businesses; it is equally important and applicable to your investment portfolio.
Risk management process in financial investments comprises of determining the risks that exist for the particular investment and implementing strategies to mitigate the risk in the way. Risk management is an important aspect of investing as it helps reduce the risk depending on your individual goals.
Whenever you make investments, you try to look at the potential returns from the investment. However, just like the returns, there is also a degree of risk attached to the investment. Your choice of investment will depend upon your financial requirements and the level of risk you are willing to take for your investments.
Types of risk management
People today are living healthier and longer, thanks to the rapid advancements in the medical world. However, living longer also means that you need to plan your investments for a longer retirement. This risk of outliving your money is known as longevity risk.
You need to take adequate measures to limit this risk. Some of the ways to can mitigate this risk are by investing for retirement corpus from an early age; keeping a high savings rate in working years, look out for second employment post-retirement, etc.
Inflation is a constant increase in the cost of goods and services in the country. Inflation reduces the purchasing power of money and higher inflation means we can buy fewer things in the future as compared to the past or present for the same amount.
As an investor, you need to select assets and implement investment strategies that have potentially higher returns much above the rate of inflation. When you are investing in fixed income instruments such as a Bank FD, Corporate bonds, etc. always be watchful that the return on investment is above the inflation rate.
Interest Rate Risk
Change in the interest rate can affect your portfolio. When the rate of interest is high, there is a decrease in the value of corporate bonds. A higher interest rate can have impact on an industry or a sector, which in turn could affect your equity investments if they are impacted negatively by the increased rates.
Diversifying your investments in different asset classes, choosing debt investments of varying maturity can help you limit the risk associated with the changing interest rate.
Many people associate liquidity risk with just real estate investments. Undoubtedly real estate is one of the most illiquid assets, but many other investments to have a lock-in period and pre-mature withdrawal attracts a penalty.
To protect yourself from liquidity risk, it is important that you have an emergency fund in place and also limit your exposure in assets which are difficult to liquidate or involve incurring expenses.
Market risk is the risk associated with the decline in the value of your investments due to economic or other developments, which affect the entire market. Market risks are unavoidable when you make any investment, however, you can lower the impact on your investments through adequate measures.
As an investor, have a well-diversified portfolio in different asset classes such as equity, debt, gold, etc. as not all the assets would not be affected in the same way or magnitude in any development. Moreover, you can reduce the risk of wanting to time the market by buying stocks at different times to average out the cost of your investments.
Credit risk applies to debt investments such as bonds and corporate FDs. It is the risk of the inability of the issuing entity to repay the interest and/or interest on maturity.
As an investor, you can mitigate credit risk by looking at the credit ratings of the issuer. Higher the rating, the lower is the risk. AAA bonds have the lowest credit risk.
Risk management process to mitigate the various types of investment risk in your portfolio
- Goal setting and investing as per your requirement
Investments are made keeping in mind your individual goals and needs, your time frame of investment and your tolerance to risk. Once you are clear about all these things, you can allocate your savings in assets which would help you achieve your goals in the desired time frame. It is important to remember that long-term investments in growth assets may be volatile in the short-run and you should not make any hasty decisions.
- Portfolio Diversification
Diversification is the process of distributing the investments in your portfolio in different asset classes. Diversifying your investments in different assets such as stocks, bonds, commodities, gold, etc. helps reduce the overall risk of your portfolio as the performance of all the assets is not correlated and in a given economic condition the performance of the asset classes will not be same. Diversification is one of the most crucial risk management techniques for you to mitigate the risk of your investment portfolio as it helps you to take advantage of the different price movements of different assets.
- Regularly monitor your investments
Depending on the performance of various asset classes in your portfolio, their percentage holding in your portfolio may change from the original allocation. Thus, monitoring your portfolio regularly and rebalancing would ensure that your portfolio remains well-diversified.
- Take financial advice from experts
Financial planning and risk mitigation of your portfolio requires knowledge, time and expertise. Taking the help of financial experts, who can guide you to select the right financial products as your risk profile and unique investment needs.
A disciplined approach to your investments and sticking to the basic principles of risk management will help you achieve your financial goals. If you are unsure on how to manage risk of associated with your investments and need guidance to help you prepare a portfolio most suited to your investment needs and minimising risk, you can consult our financial advisors at IndiaNivesh who can help guide you through your investments and also manage your portfolio risk.
Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
Know What is Pre-Market Trading & How it Works in Share Market
Most of us are aware that trading takes place on the stock exchange between 9.15am and 3.30pm. But what if we told you that it is only partially correct. Some trading (though low in volume) also takes place during the extended trading hour periods. Read on to know about more about this additional trading window and its significance. What is Pre-Market Trading Pre-market Trading is a global phenomenon and refers to trading that takes place before the usual trading hours. The usual trading hours for Indian stock markets is 9:15 am to 3:30 pm. Pre-open market stock trading is a special trading window of 15 minutes prior to the start of the working hours for the stock markets. Hence, the time frame between 9:00 am and 9:15 am is considered as the pre-open market session. This feature was first introduced by NSE and BSE in October 2010. The objective behind a pre-market trading It was observed that there was tremendous volatility in the first couple of minutes of trading hours. The core objective behind having a pre-market trading session is to stabilise the market especially when heavy volatility is expected due to some overnight major events or corporate announcements. These could be election results, reforms or new economic policies, declaration of mergers and acquisitions, delisting of shares, open offers, change (especially downgrading) in credit ratings, debt-restructuring, market rumours etc. The additional 15 minutes allows the stock markets to arrive at the right premarket stock price and not get carried away by external events or announcements. In India, premarket future or options trading is not permitted. Pre-market Trading Session – Breakdown of the 15 minutes The premarket trading period can be further bifurcated into three slots:Order Entry or CollectionThe Order Entry session starts at 9:00 am and lasts for eight minutes. The following activities are undertaken during this timeframe Placing of orders for purchase or selling of stocks Changes or modification in orders Cancellation of orders After 9:08am (i.e. completion of order entry session), orders are not accepted by the stock markets Order MatchThe Order Matching session starts at 9:08am and continues for the next four minutes. The following activities are undertaken during this timeframe Confirmation of orders placed during the Order Entry session Order Matching Calculation of stock opening price for the regular session that starts at 9:15am During the Order Match session, one cannot buy, modify, cancel or sell their orders. Limit orders (i.e. order quantity and price is specified) are given priority over the market orders (order quantity and price are not specified) during the execution time. Buffer TimeThe last three minutes of the premarket trading session (i.e. 9:12 am to 9:15 am) is considered as buffer time. This period is used to ensure a seamless transition to regular trading hours. Any abnormalities from the previous two slots are addressed during this time. Calculation of Opening price during the pre-market stock trading session The opening price of the stock during this session is determined during the second phase i.e. Order Match session. It is done with the help of a specific methodology. This calculation method is referred to as the call auction methodology or the equilibrium price. The stock price which corresponds to the maximum quantity of tradable shares is known as the equilibrium price. It is a factor of demand and supply. The orders placed during the first eight minutes are matched at the equilibrium price and then traded accordingly. Some scenarios: If the highest tradable quantity corresponds to two different stock prices, then the stock price with the lower unmatched orders is taken as the equilibrium price. For example: Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 30000 20000 -10000 Though the maximum tradable quantity is same in both the cases, the equilibrium price will be considered as 105 as it has a minimum unmatched order size If the values of the highest tradable quantity and unmatched orders are same or equidistant, but they correspond to two different stock price, then the above methodology cannot be applied. In this case, the equilibrium price is taken as the stock price which is closer in value to the closing price of the previous day. For example, Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 25000 20000 -5000 Assuming the closing price on the previous day was Rs. 110, then the equilibrium price in the above example will be Rs. 105. What about orders that remain unmatched or are not traded in the pre-open session? Orders that are not traded or remain unmatched are carried forward to the general trading session. The opening price of these orders is determined in the following manner: Limit Orders i.e. orders wherein the price and quantity are already specified are carried forward at the same mentioned price Market Orders i.e. orders wherein the price and quantity are not specified are carried forward at: If the opening price was ascertained during the pre-open trading session but order not traded, then at the determined price If the opening price was not discovered, then they are carried forward at the previous day’s closing price Stock Markets tend to be overwhelming for many investors. The concept of premarket trading can further compound the complexity level. However, as an investor, you should always remember that help is just around the corner. Professional experts like IndiaNivesh can help to simplify and demystify the entire process. The team at IndiaNivesh keeps a close eye on this Pre-market session to comprehend the mood and strength of the stock market. They track the pre-market stock prices and take the best decisions for your portfolio basis the market sentiments. Moreover, since they offer a wide range of services (broking, mutual funds, institutional equities, private equity, strategic investments, corporate advisory, etc.) they have a holistic view of the market and the economy. Their expert opinion can help you to amp up your investment game. You can read more about their offerings, vision and accomplishments on their website https://www.indianivesh.in/Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
Online Trading – 5 Essential Tips for Trading Online in 2020
Technological advancements and digitalisation have changed the online arena for every business, and the online share trading is no exception to the trend. Over the last few years, online trading has become very popular, especially amongst the millennials and generation Y. Prevalence of smartphones, lower costs, opportunity to earn extra income, low entry barriers, ease of access, etc has had a profound impact on online trading. Even though online stock trading today is huge, and many people are motivated to explore online trading for a rewarding career, by no figment of imagination it should be assumed that it is easy, and they can become financially self-sufficient in a short period. Here are 5 essential online trading tips to help improve your chances of success in your endeavours as a trader-1. Do the research and gain relevant information about the markets The economic conditions are constantly changing and it has a significant impact on the stock markets. To be successful in online share trading you have to do your research, collect relevant information and be updated about matters relating to markets. With information being available at the click of a button, it is easy to get access to information from various sources. Keeping your eyes and ears open about the official announcements being made, reading up market-related articles and financial publications can help you ace the game of online stock trading and avoid making whimsical trade calls. 2. Get acquainted with the trading terminologies and tools Getting yourself familiar with various terminologies and trading tools beforehand is extremely important so that you do not falter when you start trading. Clearing your basics about the important workings, different types of trades, important terms are critical. If you are not clear about the basics, then you may end up placing a wrong order. Once you are trading online, you are investing real capital and you cannot undo the trade. So, it is essential that you must be familiar with the features and the functions of the trading platform which you are going to use. Practice trading on dummy versions to get a hang of the trading interface before you can start with online trading. Once you have enough practice you will not be flustered and confused at the time of real trading. 3. Start with small capital and practice risk management There are infinite opportunities in the trading world and you do not want one experience to be the deciding factor for you. As online trading is risky, you should always make a small start in the beginning and invest little capital. Even the most successful traders do not put their entire investible surplus for trading but use only the capital which they have to spare after they have put aside for their long-term goals such as retirement. So, invest only the capital which you can afford to lose and which will not affect your financial planning. Another important thing to keep in mind at the time of executing trades is that the risk associated with trading is high and hence you should take adequate measures to minimise risk. Setting a stop-loss to your order will automatically stop a trade if the losses hit a particular mark and help minimise your losses. 4. Be patient and disciplined Online trading is a great way to make an income and many have successfully made a career out of it. If the success stories of other traders have motivated you to take the plunge, then, let’s be honest, online trading is risky and not for the light-hearted. Moreover, it is not something you can master overnight or become rich overnight on a single trade. To be successful, you need to have the right mindset and should be disciplined in your approach. Make a trade plan and stick to it. Trading out of impulse or greed will not help you become successful but following a plan and trading when you see opportunities can help you achieve the desired results. 5. Select the right broker and trading platform Last but not least, choosing the right broker and opening the best trading account online is important, and hence you should be careful about your selection. Choose a trading platform that best meets your needs and has a user-friendly interface. You should be comfortable using their software. Your success rate would be greatly affected by the timely execution of your orders. Other aspects to consider are a level of customer service and satisfaction, market reputation and competitive fee structure. Conclusion With the above essential online trading tips, you can give your income a boost. We at IndiaNivesh have one of the best online trading platforms at the most competitive price and also offer expert advisory and research to meet your investment needs.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."
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