Global Journal of Commerce & Management Perspective
Open Access

Roles of risk management strategies in stock market

Thomas Lamont^{* *}Correspondence: Thomas Lamont, Department of Economics and Finance, Leeds Beckett University, West Yorkshire, United Kingdom, Email:

Author info »

Description

Generally, stock market investments have been high-risk, highreturn investments. This happens because when economic conditions are favourable, the underlying businesses perform better and the common stock or shares of such corporations grow in value. There are various undesirable factors that influence a specific firm, such as outdated technology, unanticipated competition, or bad management. Some global and national economic variables, such as recession, conflict, or trade wars between nations, may have a negative influence on the stock market as a whole.

During these situations, stocks would lose value, and investors would lose money. This is an inherent risk that investors must consider when investing in the stock market. They yield higher returns than low-risk assets such as bank fixed deposits, but they also run the risk of losing their whole investment.

There are typically two different categories of risk in the financial markets: market risk and inflation risk. Market risk stems from the potential for rising or falling financial markets. The other risk, known as inflation or the purchasing power risk is brought on by long-term fluctuations in the cost of goods and services.

Methods to reduce the risk in stock market

In contrast to the market risk, which is more relevant in the short term, inflation risk is a key factor to consider while making long-term investments. Inflation risk cannot be avoided, but market risk can be handled and controlled to certain extent.

Following the trend of the market: This is one of the tried-andtrue ways to reduce stock market risks. The challenge is that marketing strategies are hard to identify and evolve quickly. The market trend might only continue for one day, one month, or one year, yet short-term trends nevertheless function inside longterm trends.

Portfolio diversification: Another effective inventory market risk management method is to spread your risk by investing in a portfolio. A portfolio diversifies your investment across many firms, industries, and asset types. There is a chance that the market value of one investment will shrink while the value of the other will grow. Mutual funds are another way to spread the impact.

Loss: Another technique for ensuring that you do not lose money if the stock falls massively is a stop loss or trailing tool. In this strategy, the investor has the option of exiting if a specific stock falls below a predetermined level. Some investors use selfdiscipline to sell when the stock falls below a specific level or when it falls precipitously.

Patience: Getting anxious under turbulent market circumstances is counterproductive. As an investor, you should be focused on your stocks and methods, making rational entry and exit decisions rather than being nervous and acting out of fear.

Conclusion

To trade for the long term, a trader must acquire and understand all of the risk management tactics necessary to operate in the stock market. Risk management entails calculating market risk and volatility. The trader can use the following strategies to not only reduce losses but also terminate a deal if needed. It is also necessary to get professional advice while investing in the stock market in order to fully understand the preceding tactics. Get research-based trading tips and trade responsibly.