Risks of stock investing
One thing that you must always remember is that stocks are by no means risk-free, neither do they carry any guarantees. Some companies do carry a dividend, something that will be talked about in later lessons, but even a dividend is not guaranteed. This is why it is important to realize and know what you are doing when you invest in a stock. You must realize, that in a worst come to worst situation you could lose all of your money if for example, the company you own shares in goes bankrupt. However, risk is not all negative, the bigger risk you may take, the bigger rewards you get. This is why historically stocks have on average made more money than other investments like bonds, or savings accounts. Risk isn't bad if you know how to correctly manage it. However, with that in mind let's look at some risks of stock investing.
Sector/commodity risk
Sector/commodity price risk is based on two key elements that can drive a stock up or down. First off, I think it would be wise to explain what a sector and commodity is. A sector first off, is an area of the economy in which corporations share the same or a related product or service. For example, technology companies like Google and Apple can fall into the tech sector. Let's use Company B as an example. Let's say Company B is a precious metals mining company. If other companies that are within the precious metals mining space are starting to fall, then this may mean an overall decline in the precious metals sector. So, even if the stock isn't performing poorly, it may get dragged down just because the overall sector is getting dragged down. A similar example can be used when talking about commodity risk as well. Let's use Company B again in this example as well. If the price of gold goes up, this means the value of the goods that they are producing goes up as well. This is obviously a good thing, and this could fuel a stock higher. Again, things can go either way when talking about sector and commodity risk, it could work in your favour and help you reel in cash, or it could burn you.
news risk
News risk is the risk that news or headlines in the media will negatively affect your stock. Due to the endless amounts of headlines that are created everyday, no company is safe from this risk. To give you an example, when Greece went bankrupt and needed a bailout it not only affected individual stocks and economies, but affected the global economy. Some headlines that are often created can help produce backlash against certain companies and sectors. So no matter what you do, there is no avoiding the risk of bad news.
Rating risk
A business' credit rating can often fluctuate and always directly impacts the corporation. It can impact a company most notably when it is trying to negotiate an interest rate when borrowing money. However, the most important rating that can shape a stock's performance is analyst rating. Though this rating by analysts is nothing more than an educated guess, it always has and will influence a company, whether in a good or bad way. Most of the times, these analysts are based off of a piece of news, or earnings report, or something along those lines.
Expiration/competition risk
One factor that many people overlook is the factor that a business may become obsolete. With this tech savvy and evolving world, things are rapidly changing day by day for better or worse. This means that some businesses just can't operate the same way that they used to. A perfect example is Canada's own Blackberry. Once part of the holy grail of the cell phone industry, Blackberry just couldn't keep up with the innovation that Apple had produced with their release of the iPhone. They just couldn't compete with this epic creation, more and more people started switching from their Blackberry phones to acquire newer, more feature-filled cellular devices. Their business model had become obsolete due to competition, and their fall from grace sure wasn't pretty. This is why you always have to be careful to be sure that the company you own has a business model or idea that helps differentiates themselves from competition.
operational risk
Mistakes are often made in the world of business as nobody is perfect. However, many times a mistake is not caught or found out about until a long time after. Whether it was accidental, or on purpose many operational issues are often discovered that can turn the tide against a company. Doesn't matter if it is improperly stating earnings, making deals under the table, violating rules or contracts, an operational mistake can often create wounds for your company that cannot be repaired. This can be detrimental to the trust of a company as well, just ask SNC Lavalin.
in conclusion
"There is no reward without risk."
To conclude, stock investing is far from risk-free, sometimes it is good, sometimes not. The biggest thing is making sure you are fully aware of a company's risks before deciding to invest in a company. Just remember, "There is no reward without risk."