Sharekhan is a brokerage firm that offers a diverse range of financial products and services, including but not limited to; mutual funds, ESOP financing, etc. It is an online platform to help you from the basics of investing to a fulfilling trading experience.
Investing in the stock market has its share of risks. In this blog post, we will discuss 10 ways to combat market risk designed by Sharekhan.
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If you’ve ever taken a statistics course in college, you might have heard of the standard deviation. Just like a pendulum swing, the difference in the position of the pendulum from one point to another, the difference between two positions, is the standard deviation. Likewise, a stock has price fluctuations, and it is essential to understand the risks involved with it.
Having stocks in your portfolio is essential. However, investing in the right stocks is more critical: Sharekhan’s recommended stock list helps diversify stocks based on fixed parameters, which helps maintain a diversified portfolio for the investor.
Consider alternative investments: Sharekhan also recommends alternative investments.
An alternative investment is a structured note issued by a major bank. For example, Goldman Sachs and the operation of these structured notes is simple.
You get to participate in a percentage of a stock index. If the index loses value, there is a buffer called buffer index. For example, if an alternative investment loses value by, say, 10%, and the initial fixed value is 10%, the investor loses nothing but can keep all of the gains from a fixed rate. (say around 12% even though the index is up 15%). In this way, the risk involved is minimized.
Investing in fixed index annuities: Fixed index annuities are also called growth annuities or bond alternatives. There is no risk of loss in this case. Even if the market goes down, there is no loss. On the other hand, the gains are negligible, i.e. 4-5% instead of 12%, hence low risk and low return.
Invest to hold shares in the future and not for immediate gains: buying a share is like owning part of a company. Without being overly optimistic or pessimistic, Sharekhan helps you invest in stocks based on a stock’s fundamentals rather than the company’s immediate gain or loss. Based on trend analysis, past performance of stocks and analysis of annual reports, Sharekhan helps you identify stocks to invest in for long-term gain.
An option for every type of investor: The investment and the level of risk one can take vary according to age, income and personal preferences. If an investor wants to go the conservative route, most people are suited for that route. One can opt for a mix of stocks and bonds in this case. The allowance must be renewed once a year with a fixed amount of capital allowance. This also includes the average purchase price. This also helps to ensure that the portfolio is not limited to one sector. There should also be large companies with numbers showing an established balance sheet. This helps to ensure companies are prudently funded, with a current ratio of 200%. Such an option also ensures that these companies do not miss dividend payments and do not have profit shortfalls. They also have earnings growth of 2.9%. Nor should you pay too much for assets or income. The PE ratio should not be greater than 50%.
Invest as an enterprising investor: Today’s stock market is more risky because the profits companies can make are limited, and the price is also limited. The market tends to overvalue or undervalue companies. Here it is crucial to avoid growth stocks because the valuation is based on future earnings. On the other hand, if a stock is undervalued, you pay next to nothing for the additional costs. Some diversification should be applied. However, the number of companies is not immutable.
Insist on a safety margin: Every investment you make should have it. This minimizes the risk of being wrong. Price is not equal to the value of a business. The price of a business is about two-thirds of its real value. For example, Apple’s stock price is around $220, but the company’s value is $371. Expected growth is around 5.8%. Microsoft and Amazon have a stock price of $108 and $1971, respectively, with values of $72 and $2115 and expected growth rates of 21.5% and 74%, respectively.
Risk/return correlation: The correlation is not always linear. The price and value of assets are often disconnected. The minimum return goes to the passive investor and the maximum to the enterprising investor. Maximizing return always comes with higher risk. The academic route to higher returns carries higher risk. But price and value are not the same. Choose businesses with moderate risk and moderate return.
Focus on stock fundamentals: PE ratios, current ratios and established sales are key numbers.
Identify your personal preferences before investing: There is no single investment. It is advisable to increase gradually for riskier investments. Even with Sharekhan’s advice, market trends can be unpredictable. Sharekhan’s investment assistant AI tool can help you recommend the best stocks based on your investment history and preferences.
For a detailed disclaimer, please visit Sharekhan’s website.