Why The Terms Risk Or Uncertainty Are Different In A Stock Market Context
Most of us tend to equate the terms risk or uncertainty in an interchangeable manner. For most investors these are the common terms when it comes to investment apart from how to compare brokerage. But on careful observation there is a difference between both of them. The moment you make an investment decision both these terms are attached to it. Though the key is to manage risk along with uncertainty as part of your investment decisions.
Risk can point to occurrence of loss
Before we take stock of risk, we need to understand what loss is. Loss points to the fact something bad might occur or a good thing is not going to happen. Quiet often you might have found out that a top company announces profit but the stock price plummets. Now have you ever thought on the lines why such a situation occurs. All of it boils down to the perception of risk. Suppose the market expected the profits to soar by 25 % and it came down to 18 % then it is a risk. Since risk is going to increase as so too the profit levels stoop down. Once risk increases in size the value of a stock is expected to go down.
Now let us consider another situation. Suppose the market is of the opinion that the price of a certain stock would fall by 15 %. Now if it fell down by 10 % it is reduced risk. You could be in for a surprise as the price of a stock rises in such cases.
From a stock market view, risk is what can be quantified. You can manage and measure it. Investment can be classified as systematic and un systematic risk. The former is known to have an impact on all business in an equal way. Examples could be high inflation rate, high rates of interest etc. With unsystematic risk it could be tough competition or weak margins. This is something that you can measure on the basis of your past experience, and this is where it differs from uncertainty
Uncertainty might replicate a risk but it is a lot different
By uncertainty it points to the fact there is no certainty. This is not going to help or enlighten you too much. In fact it leads to a situation where things are not clear and the outcome is not certain. You might venture into it but not sure what the returns would be like. For example Uttar Pradesh might be prone to earthquakes but you are not sure in the next 5 to 10 years earthquake may strike the region or not.
From a view point risk is really important in terms of investment strategy or be it financial planning. The reason for this you have to manage the risk. The moment you are not aware of the outcomes it is hard to predict the reliability. You could not even assign probability to a situation that is uncertain.