One of the fundamentals to understand when investing in stock market is that it involves a fair amount of risk.
Whether you are new or seasoned investor, your goal is to minimize risk.
The more we are aware of what these risks are the better we can mitigate our exposure.
Business risk.
Some business operates in industries that are highly volatile or competitive in nature.
Think of the personal computer hardware industry.
The profit margin can be very low and unless you have strong distribution channel or retail network, it is very difficult to stay viable in this market.
Airline industry is also another highly competitive industry.
It needs very high capital expenditure to stay in the business and the operating cost is also very high due to the high volatility of jet fuel cost.
Airline needs to run a highly efficient operation and strong marketing strategies in order to generate decent profit.
On the other hand, public transport operator such as mass transit operators typically have very stable business environment even during an economic downturn.
If we understand the business the company operates in, it can help to significantly reduce their level of risk exposure.
Corporate governance.
It is common knowledge that behind every good company lies a strong and capable team of people managing the company.
Is the business run by capable and honest leaders with a high level of business ethic and integrity? Enron is an example of a company that does not seem to have a clear and transparent corporate governance.
Such information may not always be easily accessible.
However, one may gather sufficient knowledge in this area by analyzing company financial report, and attend annual shareholders meeting.
Market valuation Risk.
When a company without any clear sign of having a significant growth catalyst has its share's priced substantially higher than its fair value, then you would probably want to investigate more.
If this is a case of market speculation then you will want to avoid this company.
If you have done your homework and understand, example the margin of safety, then you could completely ignore market valuation risk, so long you have the required margin of safety built into the share price.
Some of the stock market risk factors include, Business Risk, Corporate Governance Risk, and Market Valuation Risks.
We could significantly minimize our risk if we understand them and take action to rein them in.
Remember that one of the golden rule in stock investment is not to lose money.