This is extremely true in the case of stocks, where you purchase an ownership of company that grants you the right of claim to some parts of the business’s profits, depending on how large your share is.
Knowing what risks are to be faced by the stock is knowing how you will decide your next move for that stock. Risk management is indeed very important, and knowing what the risks are is just the first step to the right direction.
Commodity Price Risk
The commodity price risk is simply the dangers of a swing in commodity prices. And these commodity prices affect the business, one way or another.
In simple words, companies that sell commodities can benefit when the prices soar high. On the other hand, those that use commodities instead of selling them tend to be negatively affected.
However, you must bear in mind that even those companies that do not have anything to do with commodities can still be very much affected by commodity risks. When commodity prices increase, consumers tend to tighten their belts and decrease spending.
Such action is like chain reaction. Decreased consumer spending affects the whole economy.
Headline Risk
Headline risks have something to do with the news. Even though they say that publicity is still publicity, bad publicity can still hurt a company’s business very much.
Negative news about one company or one industry go a long way, since consumers will become wary not only of that business grilled in the news but also other businesses in the same sector or industry.
Also, non-stop news make it more difficult for companies to control how the mass perceives their business, products, or services.
Small news that seem insignificant to some can actually punish a whole corporation, often even the whole sector. Those that are larger news tend to affect whole economies.
Risk of becoming obsolete
There are very few companies that reach the age of 100 without ever changing the way they do their business. It all boils down to the rapid pace of change in the technology and economy landscape.
A business always faces the risk to become unneeded by customers, who are always seeking new products and services that can answer better to their needs. If a business doesn’t keep up with the changes in its sector or industry, all bets are off. It will definitely become obsolete in the longer term.
There will always be tight competition and very few will want to stick to the losing team.
Detection Risks
Detection risks have something to do with regulators and compliance authorities. The risks lie in the chances that such officials won’t find the secrets in time, making news about it surface and thus destroying the reputation of the company.
In other words, it’s better to detect such wrongdoings ahead of the officials and the media and straighten it up.
Sometimes, the damage that detection risks incur to a company is irreparable.
