Managing Risks in Stock Investment

Omolabake Fasogbon

ust like every other business, stock market investment comes with its own risks.

Over the years, the Nigerian stock market has been a mixed tale of opportunities and challenges, driven by dynamic internal and external influences.

It is considered one of the most trusted and viable wealth platforms for investors to shoot their shot. Getting the best shot thus depends on how an investor navigates risks. This is not disputing the fact that stock trading remains a game of profit and loss, most times defying analyst prediction.

To be on a safe side, it is advised that investors study and understand inherent risks to know their limits. These risks not only stop at stock performance , external variables present risks that vary from market, liquidity, regulatory, inflation, credit, operational and security concerns, amongst others.

While these risks are inevitable, experts believe they can still be managed effectively. Basic precautionary protocols are suggested, including: checking the profit base of a listed company, avoiding pegging investment decisions on rumour, investing within limit and tolerance level as well as setting investment objectives.

Shedding more light on the inevitability of market risk, Chief Economist /Managing Editor of Proshare Nigeria, Teslim Shitta -Bey said, “Macroeconomic policy risks Fiscal and monetary policy shape outcomes for those listed on the NGX. A rise in interest rates (nudged by the Central Bank’s increase in its Monetary Policy Rate (MPR)) would push down the prices of treasury instruments as their yields rise, steering investors away from equity to bonds and bills.

“Another risk is inflation risk, which depends on monetary policy and economic supply-side difficulties.”

He argued that exchange-related risk-protection may not be feasible, adding that an investor may want to be circumspect by de-risking his investor’s asset portfolio.

“Risk mitigation may involve a contrarian market portfolio strategy involving investors avoiding sectors with high downside probabilities and concentrating portfolios in industries with lower downside probabilities. “In other words, rather than widen asset classes in portfolios, investors may do better by further concentrating on equities that possess countercyclical characteristics; having a particular fixed-income market play would also affect portfolio returns upwards as the CBN may increase policy rates by at least another 25 basis points at the following monetary policy committee (MPC)”.

Being an equity investor himself, Shitta -Bey hinted on how he chose to be constrained to long -term and selective investment.

“I have navigated the market by taking a long view of industries and sectors rather than bothering about the short-term market, sector, or industry disruptions or dislocations.

“Economies always move in cycles; short, medium, and long-term; it is important to understand market economic points before they occur and take a strategic long or short position in the equity market.

“Traditionally, portfolio diversification was the Holy Grail of investment philosophy, but a deeper review of successful investors suggests that portfolios need not be widely diversified to be rewarding after risk adjustments”, he clarified.

Noting that inflation has always been a threat to investors’ returns, he called for consideration of inflation- resilient assets.

“It will be wise that investors shift to assets that serve as a decent counterpoise to sustained increases in domestic prices, such as holding some attractively priced fixed-income assets or fixed-income-based mutual funds,” he suggested.

He identified additional key considerations for investors, including age, risk appetite, and ethical or religious bias.

According to him, “A young newcomer to the equities market can invest longer and take greater risks. Such investors can buy stocks that grow slowly in value despite volatility along its business lifecycle.

“Older investors require income stability and tend to prefer investments with high dividend payouts and yields. A younger investor would prefer more regular trading with emphasis on short-term capital gains from price movements of corporate shares”.

He emphasised staying informed and keeping up with market trends as part of steps in mitigating risks in equity investing.

He added that investment focus and age group, sometimes determine where investors turn for market insights.

“Market monitoring depends on the investor’s ethos. Long investors mainly focus on corporate and market fundamentals while speculators opt for processing micro news and respond to these developments as they see fit.

“Markowitz’s portfolio diversification theory matters very little to these market participants who are in for the buck and in for the bang”, he added.