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Risks in Stock Investment (Part 1)

Stock investment is risky because when you do, you could lose all of your money, in some cases, more than you invested.There are stock investment risks you have some control over and others that you can only guard against. Also, thoughtful stock investment selections that meet your goals and risk profile keep individual stock and bond risks at an acceptable level.

Thus, before you buy a stock, understand the risks and decide if they are risks you can take. In this article, we will look at some risk that every stock faces, regardless of its business.

  1. Commodity Price Risk

Commodity investment price risk is simply the risk of a swing in commodity prices affecting the business. When prices go up,  it helps companies that sell commodities, but they suffer when prices go down. Companies that use commodities as inputs see the opposite effect. However, even companies that have nothing to do with commodities, face commodities risk. When commodity prices go up, consumers tend to hold back from spending, and this has an effect on the whole company, including the service economy.

  1. Headline Risk

Headline risk is about the stories in the media that will hurt a company’s business. Nowadays, almost all of the companies are vulnerable to headline risk.

  1. Rating Risk

Rating risk only happens whenever a business gets a number to either achieve or maintain. Every business has a very important number as far as its credit rating goes. The credit rating directly affects the price a business pays for financing. Whereas, public companies have a different number that matters as much as, if not more than, the credit rating and it is called the analysts’ rating.

  1. Obsolescence Risk

In obsolescence risk, it is all about how long a company’s business will keep up. Very few businesses live to be 100, and none of those reach that ripe age by keeping to the same business processes they began with. With global competition becoming increasingly technology savvy and the knowledge gap shrinking, obsolescence risk will probably increase over time.

  1. Detection Risk

Detection risk is the risk that the auditor, compliance program, regulator or other authority will fail to find the bodies buried in the backyard until it is too late. Whether it’s the company’s management skimming money out of the company, improperly stated earnings or any other type of financial shenanigans, the market reckoning will come when the news surfaces. With detection risk, the damage to the company’s reputation may be difficult to repair – and it’s even possible that the company will never recover if the financial fraud was widespread.

Part 2 can be now read in this link:

Read about How to Invest in Stocks Without Too Much Risk.


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