Risks of investing in stock market
When you invest in the Hong Kong stock market, it is important to understand the risks and know your limits. You should also be aware that while you might make gains, you could also lose. Among the major risks you should watch out for include:
- Market risk: Stock prices can be very volatile and unpredictable subject to different market and economic factors both locally and internationally.
Market risk, also known as systematic risk, usually refers to that type of risk associated to a specific market. It stems from the economic, geographical, political, social or other factors of that market. You may click here to know more about systematic risk.
- Interest rate risk: Shifts in interest rates may affect different stock prices to different extents. Also, since the HKD is pegged to the USD, interest rate movements in Hong Kong can be directly influenced by interest rate movements in the United States.
- Global risk: The Hong Kong stock market is highly open and it is therefore influenced by economic issues in all major markets. You are therefore exposed to economic events around the globe and need to factor this into your risk assessment.
- Business risk: A listed company you invest in may suffer a severe decline in profits or even go bankrupt. This could be a result of many factors such as poor management, slowdown of the industry and competition.
- Corporate mis-governance: A company you invest in may have improper management or conduct a transaction that you deem is detrimental to your interests as a shareholder e.g. a company buys an over-valued asset. The regulators do not normally intervene in commercial decisions of listed companies provided there is no breach of regulations.
- Trading suspension: A stock can be suspended from trading to avoid any uneven information dissemination and opportunities for insider dealing and to ensure trading is undertaken on a fully informed basis. You will not be able to buy or sell a stock during suspension during which time the price may move due to both market and business risk changes.
- Liquidity risk: There is no market maker for stocks listed in Hong Kong. Beware of the additional risk of being tied up in stocks which are hard or costly to liquidate. Stocks with low capitalisation are generally less liquid than those with high capitalisation.
- Currency risk: Since the HKD is pegged to the USD, if you invest in the Hong Kong stock market from overseas, you are exposed to translation losses if your local currency appreciates against the HKD/USD.
- Policy risk: Changes in government policies and regulations, both in Hong Kong and in the Mainland, could have profound impact on stocks in the relevant sectors or industries.
While you cannot totally avoid risks, you can take steps to manage them. Make sure you know what you are buying and whether it is reasonably priced. It is important to consider whether a listed company can achieve sustainable profits to support its stock price growth in the long run. Be careful when trading a stock affected by rumours or speculation. Should the rumour not be correct a correction in stock price is likely.
Don't commit beyond your means. You should manage your risk exposure in light of your investment objectives, risk tolerance level and financial position. Understand how much you are prepared to allocate to stocks and how much you can afford to lose and then limit your exposure to an acceptable extent.
As with other investments, you need to set clear investment objectives and act accordingly. For example, if you decide to use a part of your surplus savings to buy a blue chip for long-term investment, you may be more able to ride out short-term volatility. Review your portfolio regularly and rebalance it where necessary e.g. when there are significant changes in your personal or market circumstances.
Whilst Hong Kong is a well regulated market following international standards, investors must still be responsible for their own investment decisions and should take that responsibility seriously.