Everything about equity becomes plenty clear if the word risk is understood, dealt with and analyzed. Sounds complicated? Well, if you want to build your wealth by investing in the equity market, then a little bit of complication has to be tolerated. You will come to find that it is definitely worth it in the end.
Irrespective of whether you invest in government bonds or multinational corporations, there is always going to be an element of risk involved. It is only a matter of the degree of risk. Although this is inevitable, the more you understand risk, the better you will be at dealing with it.
How can you use this element of risk to your advantage?
The best way would be to use the risk factor to analyze your returns. i.e. for high performing assets, the risk is indeed high, consequently the returns you will receive will be correspondingly high. But, do not let this make you greedy and invest in assets with high risk factors, sometimes it may work in your favor and there are times when it may not. The end result is going to affect only the investor- you.
Why is necessary to understand risk vs return?
The more you invest, the more you will learn about what you should or shouldn’t do in the market. Sometimes, even a small variation in your returns can have a huge impact on your wealth generation. This is also why you need to know to diversify your portfolio (invest in unrelated and different assets instead of a single type).
Things to consider before investing in equity:
i. Choose the right company to invest in. It doesn’t necessarily have to mean investing in blue-chip companies, get the advice of a good broker to help you analyze where and when to invest.
ii. It is better and safer to invest in a long term investment rather than a short-term.
iii. Go ahead and diversify your investments
iv. Read up on the quarterly and annual reports as well as news articles of the companies you have invested in. Be aware of its performance on a regular basis.
v. Never ever give in to the temptation to buy more. You will end making more mistakes than returns.
vi. Periodically monitor and review your risk capacity and risk profile.
vii. Learn from your mistakes, don’t get excited or discouraged by market fluctuations. Be patient, and you will be rewarded duly.