Posted by Debi G Hill, CPA

Rising Risk Of Stock Ownership

Rising Risk Of Stock Ownership

8 Risks Faced by Every Stock

1. Headline Risk

This is the risk associated with stories in the media hurting a company's business. With the wave of news all over the world, there is no company defended from headline risk. Example the report of Fukushima nuclear crisis, in 2011 dealt with any stock related business, a bit of bad news can cause a market backlash against a particular company or the whole sector.

2. Rating Risk

This risk happens anytime a business is tasked a number to achieve or maintain. Every enterprise possesses a very relevant number as far as its credit rating goes. The cost a business will pay for financing is directly affected by credit rating. Companies that are publicly traded possess another that is as relevant as the credit rating that is the analyst rating. Any change to the analyst rating on a stock likely has an outsized psychological l impact on the market. These changes in grades, either positive or negative can result in swings far more significant than is justified by the situations that caused the analyst to adjust their ratings.

3. Obsolescence Risk

Few businesses function to be 100, and none can attain such level by maintaining the small business processes with which they began. The largest of this risk is that a person may look for a means to make a similar product at a less high price. Obsolescence risk may increase over time due to the increasing technology savvy.

4. Detection Risk

In this risk, whether it is the management of the company taking money out of the company, incorrectly stated earnings or any financial mischief, the market reckoning will arrive when the news appears. With detection risk, the harm on the company's name may hard to repair, and there is a possibility that the company may never recover if its financial fraud was viral.

5 Legislative Risks

This risk refers to the tentative relationship between the company and the government. Mainly, legal risk is the risk that actions of the government will stop an industry or a corporation, therefore hurting investor's holdings in such industry. The legislative risk differs in degree about the individual company. Theoretically, the government works as cartilage to protect the interest of businesses and the public in general from affecting each other. The government interferes when activity is causing damage to the public and looks unwilling to regulate itself. The government tends to over-legislate. The legislation enhances the public image of the relevance of the government as well as providing publicity for individual members of Congress.

6. Commodity Risk

This is the risk of a change in the price of a commodity is affecting the business. Companies sell commodity benefit when there is a rise in prices but suffer when there is a drop in price. Companies which have no dealings with commodities are subject to commodity risk. As there is a rise in the cost of the product, consumers rein in spending, and this affects the economy

7. Inflationary Risk and Interest Risk

These types of risk can separately operate or in tandem. Interest risk with regards to this content refers merely to the difficulties that a rising interest has on business in need of financing. As there is a rise in cost due to the interest rate, it becomes difficult for them to remain in business. If this rise in price is happening at a time of inflation, then an institution could likely see its financing cost rise as the value of dollar brought in by it reduces. An increase in inflation and interest rate together with a weak consumer can result in a more fragile economy.

8. Model Risk

This is the risk that the assumptions underlying business models and economy are wrong. When a model is no more relevant, a business that depends on such a model gets hurt. This begins a domino effect where such companies struggle or fail and in turn damage the companies relying on them. 

In conclusion, there is no such thing as risk-free stock or business. Although all stock undergoes these universal risks and other risks that are specific to the market, the reward that comes from investing could overweigh them. 

Debi G Hill, CPA
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