Risk management is a way to counter or manage a non-desirable outcome. If we look from the angle of risk everything is a risk. Even flipping a coin has an outcome. Anything that bears an outcome falls into the category of risk.
Do we need to manage all the risks? Or can we allow some risks and restrict the others? Here Risk management becomes important in identifying what types of risks we can choose to live with.
It is always said that one must not shy away from taking risks but these risks should be calculated ones. Undertaking a risk without calculations and planning will yield negative outcomes. Misery is one such outcome that we all dread. Therefore a wise man will always think twice before undertaking any action. Even if the action is as simple as speaking a word.
Risk Management in Securities market
As we all know that in the money and securities markets to make returns we invest our savings into assets. If you’re unaware of the types of assets go check out our article on the assets. In the securities market, risk management is only confined to the notion of portfolio diversification. However, “Portfolio diversification should be a natural outcome, not the norm.”
How to do a Risk Assessment?
There are a number of ways through which a person can make a risk assessment. In this article, we are only going to discuss one form of risk assessment that will work in all walks of life. Below is the full form of our Risk Assessment technique.
- S – Strength
- W – Weakness
- O – Opportunities
- T – Threats
Our inability to read and process information leads us to a lot of problems. There is a unique feature of the stock market. Irrespective of the timeline, people commit the same mistakes again and again…
What are the Risks in a stock market?
In the stock market, every share trades at a value that is multiple times its intrinsic value. Almost at any point in time be it a bull market or a bear market we will find this to be true. In a bear market, most people don’t have money because during the bull run everyone invested their savings in stocks. Nobody thought of parking some amounts in bonds. Hence, investment in bonds is common sense and not portfolio diversification.
I can go about the types of risks that a business might face or stocks in the stock market face. But they are just textbook risks. The real risk is “you” and your “expectations“. Before making any decisions about the market first you have to analyse yourself. After identifying the behaviour we can look at the market and choose to type of product or risk.
Types of Risks
In this article, we will look at practically what types of risks do different kinds of asset faces. To understand risks we must understand the uncertainty of life. Almost everything we do is on the ground. Most of our lives and resources come from the land. Therefore studying the demand and supply of commodities is essential.
- Natural Risk is the risk that are beyond anyone’s control. Natural disaster such as earthquake, cyclone, floods, fire etc
- Policy Risk is the risks that is posed by change in government’s stance towards a business at top level or grass root level. Example (Import duty, Interest Rate Change etc)
- Business Risk is the risk that is specific to a line of business.