The first word that comes to mind when you hear the term stock market?is 'risk' right??And perhaps it's the presence of a risk that makes many people, otherwise keen to invest and grow their money, refrain from entering the stock market.
While one way to mitigate the ¡®risk¡¯ is by investing in mutual funds, which are professionally managed funds that invest in the stock market on your behalf, what about those who wish to invest in stocks directly??
It's exactly for such investors who feel like they're walking on a tight rope when contemplating investing in stocks that it becomes crucial to understand the risks a stock faces?in the stock market.
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Whatever is buzzing in the stock market and economy through media has the potential to impact a company's stock price as well. Simply put, headline risk is the risk of media stories affecting the company¡¯s business.?
With tons of media houses delivering an endless supply of news across the globe, it's fair to say that no company is safe from the headline risk. But the headline risk can not always be harmful. It can even leave a positive impact as well that results in an uptick in the stock prices of a company.?
So, while a single bit of bad news like failure to achieve the target, drop in profits, piling debt, laying off employees etc can lead to a market backlash against a specific company or even an entire sector, good news like dividend declaration, profit rise, etc. can spike stock prices of the company.
Simply put, the corporate credit rating of a company is the numerical assessment of a company's credit-worthiness, by measuring the likelihood of it defaulting on its debt. It is done by analysts in credit rating agencies, like CRISIL, ICRA, CARE etc.
So, any changes to the analysts¡¯ credit rating for a company can impact its stock price. While a high credit rating shows lesser chances of default, a low credit rating depicts a higher likelihood of defaulting.?Any shifts in credit ratings, whether negative or positive, can cause swings in the stock price as well.
As the name suggests, this risk refers to a company¡¯s risk of becoming obsolete or not surviving.?
The biggest obsolescence risk can be of a company finding a way to make a similar or even better product at a cheaper price than yours. That way, your product and business can turn obsolete soon, which would certainly adversely impact your stock prices as well.
This risk is not for all companies, but for those who have hidden something. The detection risk pertains to the risk that the auditor, compliance program, regulator or other authorities may be late to detect possible fraudulent activities in a company, like the company's management skimming money out of the company, stating improper earnings etc.
With the presence of detection risk, the damage may often not be restricted to the stock price slump. Even the company's reputation would be tarnished and become nearly impossible to repair, with chances of the company never recovering from the fraud, possible too.
These two risks can either operate separately or in tandem. Firstly, the interest rate risk in this context refers to the problems that a rising interest rate can result in problems for businesses that need financing. As their costs go up due to an increase in interest rates, it's harder for such companies to stay in business.?
And to make things worse, if this rise in rates occurs at the time of inflation, then a company could potentially see its financing costs climb further. This can cause difficulty in operating and doing business due to rising borrowing costs. And the high interest rates coupled with inflation reduces consumer demand as well, which can impact a company¡¯s earnings as well as stock prices.
Companies that sell commodities are the ones most impacted by this risk. Commodity price risk is simply the risk of a change in commodity prices affecting the associated business. When commodity prices go up, such companies benefit, but they also suffer when the commodity prices drop.?
But for companies that use commodities as inputs, the effect is opposite. As a lower commodity price will lower the input cost too, such companies may see a rise in stock prices?and vice versa.
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