INVESTMENT RISKS

Market Risk (systematic)

The market risk or price risk is the potential variation in the value of a financial instrument. It is a factor, helping an investor to check possibility to meet losses due to reports that affect the overall performance of the financial markets. Market risk or "systematic risk," can be hedged against but cannot be eliminated through diversification.

Unsystematic risk 

The price of a financial instrument change on factors such as corporate governance practices, creditworthiness of the company, news (event) related factors, stock-specific issues etc. Unsystematic risks can be minimised by effective portfolio allocation of investments.

Higher Volatility

When trading activity going on in the Stock Exchanges, dynamic movements in financial instrument prices, that a security, currency, derivatives contract reflect can be called as volatility. Generally, higher volatile security, currency or derivatives contract have greater price swings.  One of the risks of trading a security is Volatility. In option pricing formula volatility is used as a gauge. Volatility shows the pricing fluctuations range of the security. It helps to estimate the fluctuations that may be happened in a certain time span.

High volatile securities prices fluctuate rapidly in a short period of time. Low volatile securities prices fluctuate slowly in a longer time span. Higher volatility can cause rapid difference from entry price in a short time period.

Lower Liquidity

The more the numbers of orders available for a security in a market, the greater is the liquidity of it. High liquidity helps investors to buy and/or sell securities/ currency / derivatives contracts smoothly and with minimum price difference, and as a result, investors/traders are more likely to pay or receive a competitive price for securities /currency / derivatives contracts bought or sold in market. There may be a risk of lower liquidity in some securities /currency / commodity / derivatives contracts as compared to active securities, derivatives contracts etc. Your orders of low liquid securities may only be partially executed, or may be executed with greater price difference or may not be executed at all.

In day trading strategy, securities, derivatives contracts etc. may have to be sold or bought at low or high prices, compared to the expected price levels, in low liquidity market, so as not to have any open position or obligation to deliver or receive a security, derivatives contract etc. resulting in losses, or with smaller profit than targeted.

Wider Spreads

The highest price that a buyer is willing to pay for a security/currency pair / derivative contract is called best buy price and the lowest price that a seller is willing to accept to sell it is called best sell price. Difference between best buy price and best sell price is called spread.

Example: if the best bid price for the stock ABC is $50 and the best ask price for the stock ABC is $50.55 then the bid-ask spread for the stock ABC is $0.55. This spread becomes small ($0.25) if a potential buyer offered to buy the stock at a higher price of ($50.10) and/or if a potential seller offered to sell the stock at a lower price ($50.35).

The bid-ask spread reflects the supply and demand for a particular asset. If spread is small, liquidity would be high.

 

News Announcements

News announcements may affect the price of stock, currency, derivatives contract etc. during trading, and suddenly can cause an unexpected upside or downside movement in the price.

Rumours 

Traders / investors should take care of rumours that can affect market intentionally or unintentionally. On news or authorised announcement it may turn again to previous side. But high margin or leverage account may not be sustained if one holds position with more quantity during high volatile time.

System-Network

There are chances for delays in order execution or confirmation due to following reasons.

At the time of very high volume trading, during periods of high volatility, when market participants are continuously modifying their order prices or quantity, placing bulk fresh orders, or if trading is halted in a security / currency / derivatives contract due to any status on account of unusual trading activity, security / derivatives contract hitting circuit filters, electronic circuit or communication network related issues etc. are belong to System – Network related issues.

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