Risk In The Stock Market: What Are They And How To Mitigate It?

What is risk in the stock market about?

These are situations that affect the monetary balance of the company. In some cases, these can be studied and evaluated to mitigate or avoid their impact, in addition to the negative consequences that they may generate. Therefore, it could be said that studying the risk in the stock market is a constant and enduring action. Since today the advances, modifications and improvements in the different sectors have changed their way of operating.

Similarly, another of the most common causes in this area are technological advances, digitization and digital transformation. Which directly or indirectly have made platforms, websites, software and devices increasingly sophisticated. Consequently, the stock market is affected for the same reason.

However, many times this can be prevented and an action plan can be established at the same time, where the company can adapt to these changes in a timely manner. Hence, the importance of maintaining a team that stays in tune with market trends and movements. Likewise, different techniques have also been created to calculate, measure and improve the strategies more and more.

Types of risk in the stock market

Within any company, it is necessary to calculate what are those threats or events that could affect investments. That is why, to improve this process and its impact, the types of risk were divided as follows:

Quantifiable:

It refers to those risks that through formulas and techniques can be foreseen.

Market risk:

They are the movements in the price of the asset, which subsequently affect the investment made. For example: changes in the economy generate a devaluation of the company’s assets.

Liquidity risk:

It happens when it is not possible to obtain the estimated investment, due to external factors or situations.

Credit risk:

It occurs when the debtor does not comply with its obligations, therefore causing a mismatch in the balance of the company. Either by failing to make payments or by breaching the contract.

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Not quantifiable:

They are those that cannot be easily foreseen or measured, since they arise after events and events.

Legal risk:

In this case, those involved are legal events and difficulties. These delay or interfere in making or obtaining the investment.

Operational risk:

It occurs when internal failures in the company have a negative impact on the development of products and services, causing economic losses.

Strategic risk:

It is due to non-compliance by the company team in their responsibilities, negatively affecting the achievement of objectives and therefore investments.

Reputational risk:

It is generated by negative publicity, which nullifies the prestige of the company or brand. Consequently, a bad image is created, which reduces confidence, in turn generating economic losses.

In general, the last two risks are not estimated by investors. Since they are part of the responsibility of the company’s workers.

Consequences of risk in the stock market

Although monetary losses are the first option when we think about consequences, this may go a step further. The risks, depending on their magnitude, can affect a company in different ways, for example:

• Capital losses
• Low sales
• Losing the trust of customers and consumers towards the company
• Changes in the structure and internal management
• Dismissal of executive staff
• Staff reduction
• Investor desertion
• Closure of the company

How to improve the outlook in the face of these risks?

As entrepreneurs or businessmen, we want risks not to threaten our company. However, this is not entirely possible, despite the fact that we are very prepared. In the same way, unforeseen events can surprise us at any time. Even so, it is important to highlight that the best way to avoid the probability that the aforementioned consequences happen, there are options. Here are 7 tips to mitigate risk in the stock market:

• Study the possible inconveniences or risks that may affect your company.
• Create an action plan for such situations, hypothetically, but based on the resources and possibilities of the company.
• Constantly review the plan in the face of new variables or changes in risks.
• Go to an expert who can carry out a correct risk assessment that offers you advice for your investments.
• Examine the risks before investing.
• Supervise and monitor the actions of your personnel in charge of the movement of the stock market, to verify that everything is going well.
• Evaluate the performance of your investments, in search of irregularities, inconveniences and improvements to be applied.

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