You should be always possessive about your hard earned money and you should never let anybody else play with it on your behalf. This is why it is important to have the top broking firm by your side whenever you feel the need to invest in the stock market. Now, if you invest in stock market then «risk» might not sound a weird word to you. Most of the people know it’s risky, but still like to play with it. What’s exactly wrong with them?Let me tell you there is nothing wrong with them. They take this risk because they know how to convert this risk to reward. So for informed investors risk becomes calculated risk and what you can calculate you can mitigate too.
Let us first understand what equity risk is. Equity risk is the risk of depreciation of one’s equity portfolio value due to stock market fluctuation. To understand it better, let’s take an example. You own an equity portfolio and when market crashes your portfolio depreciates more than the index in percentage terms and in times of bull market it appreciates more than the index then your equity risk is higher. Similarly if the fall or rise of portfolio value is lesser as compared to index your equity risk is lower. Equity risk is basically a combination of three other types of risk namely market risk, industry or sector risk and company risk. Market risk comes into picture because of uncertainty of economic growth, interest rate, inflation etc. Industry risk is the result of uncertainty of growth of a particular sector in economy and company risk arises because of uncertainty of its growth prospect.So now we are aware that once we buy an equity portfolio or a single stock we are exposed to equity risk. We might lose a whole lot of money if we don’t mitigate equity risk as it’s a resultant of various factors which we as individuals cannot control. Let us see few rules of safety which will mitigate the equity risk. For instance, it is common that all the sectors of economy cannot collapse at the same instant. In bad times there are stocks which can shield you better if you invest keeping equity risk in mind. Rather than putting all your money into a particular sector, balance your investment portfolio by investing into defensive (food, medicine, public utility) and cyclical stocks (auto, real state, cement, sugar, commodity etc.). Even if the market crashes this part of portfolio will protect the overall value of your investment. Somewhere round the bottom of market you can get out of them and reinvest in stocks which will give better returns when the market recovers.