How To Reduce The Risk Of Equity Investment
Not only is equity investment one of the most popular vehicles in the UK, but it’s also continuing to gain traction among retail traders on these shores.
In fact, between April and March 2020, as much as 20% of the volume of the FTSE All Share was from retail investors, with more than 60% being buy orders. The retail investor investing data is similar in 2022 so far.
But what exactly is an equity investment, and what strategies can you use to reduce the risk in this particular marketplace?
What Is Equity Trading?
In simple terms, an equity investment refers to capital that’s invested in a company through the procurement of shares, either by a real-trader or institutional investor.
Such shares are usually accessible and traded through a public stock exchange, which may in turn be segregated according to industry, country or market capitalisation value.
Typically considered as a secure store of wealth, traditional equities are usually traded as so-called “buy-and-hold” investments, which tend to appreciate and pay out dividends over an extended period of time.
3 Key Strategies For Reducing Equity Trading Risk
There are three primary risks associated with equity trading, and it’s important that you understand these in detail as an investor. We’ve broken these down below, while discussing the core strategies that can help you to overcome them.
1. Economy Risk
A country’s economy plays a critical role in the performance of its financial instruments and assets, particularly when you factor in elements such as inflation, interest rates and balance of payment.
Of course, there are also-industry specific conditions to be aware of in some instances, including the often delicate balance that exists between supply and demand in each individual sector. Make no mistake; such factors can have a huge impact on the performance of individual shares and stocks, creating either significant growth or periods of depreciation.
This type of risk is variable, of course, but as a general rule, it can be negated by following the latest economic news and trends. We’d also recommend liaising with expert investment management teams, as they can help you to factor in economic risk and make more informed asset selections.
2. Exchange Rate Risk
Next up is the exchange rate risk, which is most relevant to companies whose revenue is primarily derived from overseas. However, it can also affect any business that either imports or exports items overseas, as it relates to the rate at which one currency can be bought or sold for another.
Because of this, any real-time fluctuations in currency value will impact directly on turnover, cost and profitability, so this is a risk that most ventures will need to factor in at one time or another.
To offset this risk, it’s recommended that equity investors minimise their exchange rate exposure by entering into futures and options trades.
This serves as a direct hedge that can hopefully minimise losses, so it’s important to keep this in mind as an equities trader.
3. Financial Risk
Last, but not least, we come to financial risk, which is largely related to a company’s fiscal performance and how it manages its capital (and assets).
You should pay particular attention to the level of borrowing associated with a business and its equity-debt ratio, with firms that are highly leveraged significantly less valuable over time in the long-term and far more liable to go bankrupt.
To negate this common risk, you simply need to carry out due diligence and conduct a thorough analysis of a business’s fundamentals, so that you can make an informed decision that’s likely to deliver the desired return.
