When it comes to investing, it’s not you that only face risks. Companies and their stocks also have to be on constant lookout for many risks. The following are the most common risks that all kinds of stocks suffer.
Companies almost always need commodities for their products or services. Commodity price risk refers to the swing in commodity prices that the business uses.
Here’s an example: companies that sell commodities generally earn profits when prices go up but suffer when prices slip. Meanwhile, companies that use commodities suffer when prices are up and benefit when they are down.
Even those companies that have nothing to do with commodities still suffer from their price fluctuations. When commodity prices increase, consumers tend to tighten their belts and this affects the whole economy.
Rating risks take place whenever a company is being required to maintain or surpass a certain number. If it fails to reach that number, its stocks usually suffer the consequences.
The credit rating directly affects the price a business will pay for financing. Public companies have to meet the expectations of analysts and their ratings. Any changes with the analysts’ rating on a stock have a huge psychological impact on the market.
Risks of being Obsolete
This risk refers to the risk that a company’s business will go belly up simply because it’s no longer relevant or in use.
There are very few businesses that last for more than a hundred years. Since global competition is becoming increasingly advanced and tech savvy, while the knowledge gap is also shrinking, the risk of being obsolete always increases over time.
The government and the businesses in a country have a tentative relationship. And there’s risk in that. To be specific, this is the risk that any government action will constrain a corporation or industry, which means adverse effect on an investor’s holdings in that company or industry.
The actual risk can be realized in a number of ways like an antitrust suit, new regulations or standards, specific taxes, and so on. The legislative risks vary in degree according to the industry, but take note that each and every industry has this kind of risk.
Inflationary and Interest Rate Risks
These two risks can be in effect together or separately.
Interest rate risk, in terms of stocks, refers to the problem that a spiking interest rate causes for companies that need financing. As the fees and costs go up because of interest rates, it’s more difficult for them to stay in business.
If this increase in rates coincided with inflation, and rising rates are considered to be useful when fighting inflation, companies may see their financing costs increase as the value of the dollars it’s bringing in decreases.
Even though this trap is less of an issue for companies that can pass higher costs forward, inflation can also affect consumers. An increase in interest rates and inflation combined with a weak consumer spending can result to a weaker economy.