How to Manage Risk in the Stock Market

Risk management is one of the most important components to consider for an effective assessment. Based on the analysis of market, you can calculate the risk factor to minimize losses.

In order to reduce the risk of losing your investment, you need to follow certain rules and norms before buying or selling shares in the stock market.

Many people prefer to keep their cash in a saving account for a monthly increment. Though trading in stock market is a risky way, but if you learn how to invest, the income from them will be much more than the usual contribution.

Instructions

  • 1

    Market risk accompanies the open positions on transactions related to obtaining speculative income, such as buying and selling currencies, securities and options trading, etc. The danger stems from the fact that such income is highly dependent on volatile factors such as interest rates, courses, price fluctuations, etc.

  • 2

    There are four basic forms of market risk: equity, interest rate, currency and commodity. You should invest accordingly whether the evaluation falls above or beyond the value of securities, changes in interest rates, currency fluctuations and changes in goods price. Sometimes the stock and commodity risk are combined into one - the price risk.

  • 3

    In order to determine the level of market risk, assess its possible impact on the expected return and try to calculate the total amount of risk that is equal to: RR = 12.5 + (PR + RF + VR), where PR - interest rate risk, RF - risk factors - and VR - stock exchange.

  • 4

    Method for the determination of market risk is to calculate the quantitative measure of market risk. The result is expressed in monetary units and the amount of the loss is presumptive, which will not be exceeded during a specified time period (time horizon), and with the required accuracy (confidence level).

  • 5

    The procedure for determining the level of market risk is qualitative and the data is entered into the accounting system. Managing employee on the basis of information received evaluates risk and helps in making decisions according to which the magnitude of the risk can be minimized.

  • 6

    Market risk consists of several stages: identification, assessment, continuous monitoring, control and minimization. Information for decision-making must be complete as to be objective.

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