Risks Of Investing In The Share Market

Investments are one of the best sources of income around the world and have been growing rapidly in the last decade. India Is one of the largest markets for the same. One of the best places to invest in this country is the stock market which has been of the highest value and keeps rising every year. 

Stocks are the best way to get long term returns and often work as a subsidiary income for a lot of people. It is always advised for people to have more than one source of income and generally, people do it through mutual funds or investing in stocks. But these activities are not just a total gain business and people suffer a lot of losses if they don’t do it right. This article focuses on the types of shares and the risks involved in investing in the share market.

Shares

There are various ways to invest, but the most significant one is investing in shares. Shares can be defined as the holding or part of a company which belongs to the person purchasing it. The profit earned by the company is distributed among these people who are known as shareholders and have a say in the operations of the company depending upon the percentage holding they have. There are two major types of shares discussed below.

• Equity Shares-  These are the primary shares of a company and the people investing in equity shares are part of the administration as well if they hold a significant percentage and even if they don’t, they hold voting rights in the decision making process of the company. 

• Preference Shares- These are the shares which are more on the secure side as compared to equity shares but less on the profitability pattern because of their nature. Any person who invests in a preference share will be provided with the fixed dividend irrespective of the growth or fall of the business. In case the business goes bankrupt, preference shareholders will be paid before equity shareholders, but if the company grows and thieves, then also they’ll be paid the same amount.

Equity Shares

Equity shares are part of rights and profits in a business. When a person invests in equity shares, they get a proportionate part of ownership in that firm and the right to participate in the decision-making process of the company. If done right and invested in the right company, the fortunes of people turn around and if things don’t go right, people may face major losses. The reason behind such risky nature of equity shares is that it does not act as an investment, it is part of ownership where any profit or loss directly affects the income of the person. There are various types of equity shares, some of which are discussed below.

• Bonus Shares- In some of the cases, the business awards its shareholders with additional shares for their contribution to the firm. There is no monetary consideration in exchange for it.

• Rights Shares- Whenever new shares are to be issued in the market and the equity is either to be distributor diluted, the company offers them to its old shareholders first before releasing them in the market. Suc shares are known as rights shares.

• Sweat Equity Shares- The shares which are allotted as a reward to employees when they contribute to the company way more than they should are known as sweat equity shares. It should be kept in mind that sweat equity shares are different from bonus shares because of the person who is allotted them.

• Voting Shares and Non-Voting Shares-  There are some shares where voting rights are given and somewhere, there are no voting rights. The difference is mostly the monetary consideration paid. Equity shares with voting rights have comparatively higher prices than the ones which don’t have voting rights.

Risks of investing in equity shares

Investment is a complex decision and can often lead to major loss if not done right. One should either take help from experts or do proper research and market study investing in the company. It is very important to keep a check on the following risks and what can happen before putting money into a business and becoming a part of it.

1. Market Risk- The market has free flow and demand and supply are the motivators. There are various risks related to it and people often don’t focus on the price deviation which their shares might suffer or the overall fall in the value of the currency.

2. Liquidity Risk- This is a major risk for the people who trade in equity shares. There are situations when a person invests in certain shares, but after a fall in value or stagnant or any other market fluctuation, selling it becomes difficult. This is known as liquidity risk.

3. Concentration Risk- Investing all the amount of capital in one firm or one market, or one geographical area can lead to concentration risk where one market crash or fall can swallow all of the investor’s money at once. Don’t put your eggs in one basket.

4. Credit Risk- Investing in a firm where getting returns is a distant dream would be a foolish decision and is a credit risk.

5. Inflation Risk- Inflation is a major and relevant risk which is always present in the market at some level. One should always study the market trends and their effect of it on their company.

Conclusion

There are various risks involved in the investment of equity shares. It is advised to read and study all the possible market trends before actually investing in different firms.