Understanding Stock Market Risks - Updated

You may often hear this - Investing in Stock Market is risky.

In fact, investment of any kind including setting up your own business by nature is risky, and can potentially cause you lose some or all your investing or initial capital.

Actually as a paid employee you also face similar risks of losing your job when you approach 40s or 50s. It is a well known fact that HR department update this list of employees in these age groups during annual budget exercise.

So what are the possible Stock Market Risks and how can we as retail investors mitigate these risks?

1. Price Volatility Risk

• Need to learn how to time your Entry and Exit points
• Buy in batches by Average In (different from Average Down)
• Sell in batches

2. Companies Risk

• Select top tier blue chips that are likely to be rescued by Temasek.
• Limit your exposure to any stock to less than 10%, and for bigger account size less than 5%
• Limit your exposure to any sector to less than 20%, and for bigger account size less than 10%

3. Currency Risk

•  Invest in Singapore only

4. Lack of Knowledge and Skills

•  Read : http://createwealth8888.blogspot.com/2009/09/investing-knowledge-and-skills.html

5. No Time for Research & Monitoring

You mean other people got more than 24 hours? Time is the fairest commodity of all and everybody has the same amount of time, no more or no less. 24 hours a day!

Wake up if you don't have time and stop dreaming.

6. Liquidity Risk

This risk is associated with the ability to sell out our stocks easily without depressing the price level further and causing potential buyers to retreat to sideline in anticipation of more fire sales coming.

It is true that when we buy stocks which have low liquidity; we can have all the time in the world to buy slowly. I am not sure if the opposite is true when you need to sell? Do you really have the time in the world to sell slowly? Probably, you may have urgent need to raise money; otherwise, why would you be selling?

7. Dilution Risk

Even if you only invest in blue chips that are strategically important to Singapore and the government will never allow them to fail. So there is very little risk of complete failure but you are still expose to the dilution risk i.e. your interests in your holding get diluted by these companies injecting more capitals to strengthen up their balance sheets by raising more capitals through private placement or right issues.

•  Private Placement to Institutions
• You either get out or get diluted. If you have decided to hold on; then it may take a long while for your current holding to get even.
• Right Issues
• Same here. You can choose to get out or exercise your option to prevent your current holding been diluted by subscribing to all your entitled right issues to hold it at higher investment cost.

If you don't, then your interests in your holding will take a long time to get even.

8. Financial Fraud Risk

When it comes to financial  frauds, no companies, market makers, fund managers and etc in this world are immune from them. In the past, major financial frauds have happened and destroyed some well-established institutions or companies and it will definitely happen again.