Economic risk
Investing in stock markets is a gamble that only seasoned investors take the risk. This is evident with the occurrences in 2008,2000, and September 11, when an economic crisis was felt all over America.In2000, there was a crisis as a result of the overpricing of stocks and the market bubble. In the event of such only, the investors bear the brunt of the damage. Their investment deteriorates as this was the case with many tech companies during the time of the crisis, the market bubble was caused by factors that were not anticipated at that time. Firstly, the employment of parameters that ignore revenue generation.interest was only placed on business and the money they made but not on how this money was produced and the underlying factors of production, One theorized scenario was on the nodes connected on a computer network, perhaps the internet. The greatest fallacy made was that the worth of a system was on the number of nodes. Therefore as the number of devices grew, the more valued a company becomes. Ironically, it was since had the company been valued on the amount of money generated then the crisis could be averted. A study by the world’s largest bank HSBC holdings postulates that new tech companies were overvalued by almost 50 percent. They were thereby making these companies lucrative for unsuspecting investors. Even at the moment, there are speculations that tech companies might cause another economic fall out because of how they have been overvalued, for example, Facebook is currently thought to be worth almost around a hundred billion dollars this might not be the correct figures since the valuation is not benchmarked on future and current income. For anyone investing in stocks should have learned from history. The stock valuations are imaginary, and one might lose their investments as the economy is unstable. Future investors should be hopeful that the economy becomes solid and invest in highly valued companies with good annual returns. Globalization has also made it more accessible as one can invest in companies away from home, therefore once can consider investing in foreign stocks. Portfolio diversification is essential, especially when the stocks come crushing, one can diversify by investing in bonds and fixed income securities.
Inflationary risk
When the economy worsens, inflation kicks in, and it affects everyone. The majority who feel the effect are those who have invested in fixed incomes. Inflations create economic slumps and damages value in an economy.many are oblivious about inflation and make assumptions that it is always in control, the peaking interest rates are even dangerous than the problem itself, governments borrow to fund development projects, other to support economic resuscitation programs such incentives only prepare the return of inflation. Businessmen indeed are men of tact and vigor,just in time, they always shift to more stable investment packages able to resist inflation, the hard assets favored include real estates and precious metals like diamonds and gold. The economy hurts fixed incomes as it deteriorates their values. The best remedy to inflation is a stock investment because companies are able to make rectifications on price. Massive global recessions may mean that the stocks would be hurt, but this would only be for some short time as they would bounce back and adapt to the situation. Another aspect of inflation is that when it swings in the purchasing power reduces making the costs of commodities high. The prices of stocks are also affected during booms; they reduce drastically, the dividend-paying stocks making investors without their expected returns. The direct effect on stocks is that it affects share differently; the value stocks perform well during high inflation whilst the growth stocks do better during low inflation.This creates a scenario where a potential investor should carefully analyze before determining the kind of capital to invest in.
Market value risks
Market value risk is the situation where the market-society rejects your investment. This happens when investors chase after hyped up companies abandoning stable and good companies. The phenomenon occurs when both good and bad stocks suffer as investors crash out of the market. Tactical investors view this as a time to restock as the values of these good companies drop massively. An example of such an investor was Warren Buffet when he invested in Starbucks, yet it wasn’t the favorite at that particular time. It is not wise for one to invest in only one section of the economy, by diversifying investment one creates better chances of growing your stocks at one particular time. Market risk is championed by a different factor, including threats that currency would either rise or drop; another factor is the share price speculation. Shares are speculated to either rise or drop. The only solution investors have to avoid the brunt of market risk is to diversify into different markets as possible. This would weigh down the effect of systematic risk.
Risk of being too conservative
Careful investment is an attribute that is hard to acquire. Most investors rush to invest without thorough considerations on which company to buy stock and the amount of capital to purchase. However, being over too conservative is a risk of achieving returns for investments. One of the critical attributes of entrepreneurs is their willingness to risk. Risk your money in that company that everyone thinks might be falling, you might win opinion bet. Investing in well-established companies is good for security of purchase, with such companies expect little dividends for your stock, on the other hand, investing in a company that might be struggling is not appealing, but in the long run, the return for investment is vast as compared to the other highly valued companies. When an economy comes out of a recess, investors will tend to shy away from investing in the affected sectors. Research has it that they will move to those sectors that were unaffected. Unfortunately, such moves only create similar problems like market value risk, an investors decision to invest is bound on experience as a reason, for an investor who has a keen interest in agriculture and has invested in stocks from companies dealing in agriculture a slight upheaval in that sector would make such an investor think twice whether to keep investing or opt to another field. Experiences good or lousy influence the choices made by the investors. And this affects stock investment in the United States. A group that has been so conservative to invest is the elderly and those about to retire, they see stocks as a gamble and only buy shares in stable companies. Portfolio aggressiveness is suitable for young investors as this acts as a cushion for the negative actualities in an investment like market crashes. Investors are motivated to diversify and not put all their eggs in one basket.
Liquidity risk
Potential investors fear the inability to sell one’s stocks to avoid losses. An excellent way to avoid this risk is by diversifying. When an investor expands, he/she reduces the chances of making losses or losing their investment. Ideally, if one performs very poorly, there is a potential of other investments being at their record best. Investments experts advise that it is never wise to put all your investment in one avenue. Furthermore, investors can minimize this risk by index investing. All investments share the brunt of the risk; this is done by tracking a particular index. Exchange-Traded Funds (ETF) such as (SPY), the Vanguard Total Stock Market give this advantage.
Legislative Risk
The legislative risk is the relationship between the state and businesses. Investors should think straight when investing in overregulated corporations, as this affects the overall return for a stock investment. The government comes with new regulations like antitrust legislation, the addition of taxes, and these risks are different for specific industries. According to the McLaughlin list, the petroleum industry and other manufacturing businesses are mostly regulated compared to sectors like transport. These investments face a plethora of regulations in terms of how they handle data, and their revenues are highly taxed, thereby reducing their overall output. For potential investors, they should look keenly and diversify as this might be the only solution available first hand. In capital economies like the United States, the government keeps a keen eye to avoid consumer exploitation in these trivial industries. This clearly makes dividends on the stock to be little in comparison to other sectors like transport where there are considerably few regulations. Governments regulate some of these essential sectors to create legitimacy in the face of the public. In some instances, these industries are the key sources of government revenue; therefore, without regulations, governments might lose key stakes in their public finance.This might lead to an inability to provide essential state and government services. The legislative risk might be unknown to an investor who doesn’t research the industry to invest, thereby leading to a fixation of income. It, therefore, becomes vital before acquiring stock to do a background study and search to determine whether the risks match the potential revenue.