What are Investment Risks?

Reuters describes the lessons from Charles Schwab,

“1. While you’re young, get out there and work every job you can.

2. Take the risk – even if you are not totally ready.
When trading commissions were first deregulated decades ago, no one – including Schwab himself – truly knew how a low-cost brokerage strategy was going to play out. But he went for it, and his current $7.8 billion net worth (according to Forbes) indicates how well that bet paid off.

His motto: “85% ready is good enough,” he says. “If you’re 85% of the way there, then make the decision to go for it. Hesitation doesn’t do anybody any good.”

3. Turn your weakness into advantage.

4. Do the hard things.

Another of his lowest career moments: When the Schwab board let go former Chief Executive David Pottruck. Not only because it was a delicate situation with a longtime colleague, but because it meant Schwab himself had to reassume the title of CEO.

“That was a really down time,” he remembered. “It felt like a fire hose of water coming at my head, becoming a CEO again at sixtysomething.” But a public company’s primary responsibility is to its shareholders, and even though it wasn’t comfortable or easy, Schwab did what he felt had to be done.

5. Do not think in terms of family dynasties.” Read more…

Investing in shares definitely attracts a lot of individuals as they can expect good returns on the investments. Past stories of some investors who invested in companies like Reliance, Infosys Technologies in the initial period became millionaires and billionaires adds to the attractiveness of the stock market. Not only Reliance,Infosys there are many companies which has given exceptional returns to the investors. There are many instances where investors have lost money and have become bankrupt as they have invested in new start up companies or small companies.

Types of investing risk in shares

Business risks: Risks associated with the type of a business and the product/service offering of the company. Change in buyer behavior, introduction of better products adds to the business risk of a company. For example – A company has only one product. Any negative effect to that product will directly affect the revenues of the company.

Industry risk: Changes in law & regulations, improved technology, can affect the performance of an industry or a sector as a whole. This risk is applicable to all companies in the industry. Take the example of regulated industry like oil. Companies sold oil at a lower price than the cost of production. This will have a negative impact on the profitability.

Financial risk: Financial Management is one of the most important aspect of any organization. Optimum level of debt, equity, reserves etc and company finances should be maintained adequately for smooth functioning of the company.

Management risk: Corporate Governance is an integral part of every company. The Board of Directors, Senior Management, Policies of Corporate Governance are important criteria before investing in a company. The Management should focus on long term vision rather than taking short term decisions.
Exchange rate risk: These factors affect a company which does business outside the country. It may be importing, exporting or any other transaction done by a company in a different currency. This risk cannot be nullified but can be reduced through various currency hedging risk strategies. Export oriented companies are majorly affected with this type of risk.

Global economy risk – As the world has become a global village and all the economies are linked to each other. Closely linked economies are the worst affected. Meltdown in US economy affected all countries as US is the most important country in the world. This has also affected companies doing business in those economies. For example – Most of the Indian software companies were affected badly because of the US slowdown as majority of the revenues comes from US.

As an investor, understand the risks associated with the companies,industries, sectors you invest in.