The Common Risks To All Stock Market Investments
Even after you diversify your portfolio, there are still some risks involved in investing in the stock market. This risk is known as the systematic risk.
Systematic risk is the risk that influences the entire stock market and cannot be done much about. The systematic risk could occur because of any political event or because of a change in the monetary system etc. If this happens then the entire stock market will crash and it does not matter which stocks you are invested into.
What could be the reasons for the systematic risk?
In the case of an interest rate change, fiscal deficit, de-growth in the gross domestic product or because of inflation there could be systematic risks. The list could include many other things but the basic idea is that the systematic risk is what will affect not just one stock but the entire stock market. So even if you have a portfolio of say 20 stocks then every stock will get influenced because of the systematic risks.
It is not possible for you to diversify this risk
You cannot do anything about avoiding the systematic risks. These are apart of the system and you cannot diversify it. So how do you protect your capital from the systematic risk? The only way to do that is to hedge your investments.
Hedging is a technique used to eliminate the systematic risk. Hedging is not diversification and many of them tend to confuse both of them. Diversification helps in order to minimize the risk but hedging is done in order to minimize the risks caused by things that are not in our control. Thus take care to understand that no single investment or trade is safe and thus everything has to be protected.
How do you calculate the return on your investment?
While every investment carries its own share of risks the investor first invest into the market thinking about how much he would actually want to make with a particular trade or investment. This is known as the expected return on the investment. The answer to this question is something that is pretty straightforward. You invest in a company and expect a certain percentage return on your investment.
This is absolutely simple to understand but still holds a lot of significance. It is a key number to manage your investments. This expected return is used in many calculations and this is what is used to optimize your portfolio or estimate the equity curve.
If you heard about the Crypto Code scam, then understand that expected return is not similar toa good guaranteed return.