Aren’t stocks riskier than other financial instruments?.. and the more after the recent fall?

This is quite common doubt among most of the people who stay away from the market and are satisfied with meager returns from their fixed deposits or bonds. It is quite probable that market condition change with time, causing a great company to lose its business and its stock to fall. But, rarely a stock is priced below its fundamental value and if at all it does, there could not be a better opportunity to buy such strong stocks. A realistic investor will move from stock to stock with the change in market condition hence averting any such loses.


In last 5 years, NIFTY Index has moved from 1051.80 on June 16^th 2003 to 4517.10 on June 13^th 2008. Had someone invested in Index fund 5 years ago would have made an average of more than 60% return at simple interest and more than 30% return even if taken in compounded terms. And all this return would have come without any botheration of switching from one stock to another(except for the fact that constituents of Nifty are changed).A 30% return overshadows all the misgivings about the risk involved with investing in equity. Equity might be riskier in short term but it becomes safer as the duration increases. The graph does reflect unexpected fall in 2004, 2006 and again in 2008, but such negative returns has always remained for short term and a long term investor would not bother for such movement. Such an impressive return even after taking the latest fall into account gives a clear impression that investment in fundamentally sound company would rarely disappoint.

A retail investor is often scared of speculation in market. Speculators are bound to be there, and this in fact helps in increasing the volume of trade. It brings down the impact cost, as a buyer will always find someone available to sell at that price and vice versa. Most of the speculation happens in small-cap companies. But looking at the fundamentals will easily filter out such stocks from investment perspective. Moreover the speculators have also started moving to derivatives from these small-caps, making equity more reliable.

Investor loses when he buys the right stocks at the wrong price and at the wrong time. Recent fall of DLF Limited is an example of such a stock which came below its issue price. A month back buy of this stock could be termed as right pick at wrong time. Though the stock is fundamentally strong, the recent slow down and doubt about the economic growth in coming days brought down the price of infrastructure firms drastically and DLF was no exception.

People start believing stocks to be prudent investment when it is not. Last year was golden year for many people who blindly invested in stocks without looking even at basic fundamentals like balance sheet & income statements and made decent gain. Stock was hyped all the way to be the obvious choice, but the correction taken place this year has made people believe it to be riskier and safe to stay away thing. And this happened when many stocks are available at bargain price which should have been bought.

To sum up – People lose in market because they seem to be more comfortable in investing in business they are entirely ignorant about. The stock becomes riskier for those who get into market without any planning and knowledge. Hence, one needs to do self analysis to see how much of risk he is comfortable with, whether he is a short term investor or a long term investor, and how will he react to the sudden, unexpected and severe drops in the prices.