I have given so many important details on Colombo Stock Exchange trading in my previous posts and some times you may think that investing in this share market will provide guaranteed return. But the truth is Share market investing is one of the most unpredictable investing methods which associate with risk. Some times your can double or triple you’re hard owned money from week but in the same time you can lose your entire money from a day. So you may get an idea that this investing method is associate with lots of risks. There is a golden rule in investment “Low Risk Low Return and High Risk high Return”. Investing in Share market is a high risk method and the return is also high. Before consider in return you need to identify the risks associate with this investment method. Risk in Colombo Stock Exchange (CSE) or any Share market can divide in to two categories and this can provide in following formula.
Total Risk = Systematic Risk+ Unsystematic Risk
We will further find out what are Systematic Risks and Unsystematic Risks.
Systematic Risk
Systematic Risk is affecting all assets of your portfolio and this is a common impact. This risk cannot be diversifying and can affect for various sectors such as Travel and tourism, Bank and finance, Manufacture etc… This systematic risk is also known as Market risk. Systematic risk is affected to entire country so this risk cannot be omitted from Colombo Stock Exchange individually.
Unsystematic risks
An unsystematic risk does not affect all assets of your portfolio and this may affect some part of your assets but not your entire assets. For example we can say Rubber market getting higher in the year of 2014 and tea market get down in same year. So the companies who do Rubber plantation and manufacturing of rubber may get good return in that year while tea plantation companies get low return. Effect of unsystematic risk can easily omit by using diversification.
The price of a stock is not stable and sometimes it change in hours to hours of a trading day. The major things to change the price in secondary market are the mentality of the investor. While some investor think that this stock is good for pick and other may think that this is the time to sell the stock. Having rough idea about the real value of stock may definitely helpful to have a better investment decisions. This is very important to have a better idea about the risk associate with this market and these risks which I mentioned are not only valid for Sri Lanka. It’s also valid for international stock market too.