The risk vs reward debate has been going on for time immemorial and even more so today in the trading sector with everything happening in the world. However, even though we’ve gotten much better at mitigating risks, they’re constantly looming and in the back of most investors’ minds. For instance, stock trading can be an excellent way to generate generational wealth and support industries in different fields.
But before you run to https://tradingguide.co.uk/awards/stock-brokers/ and make your stock order. There are some real risks you should be aware of. Obsolescence, bad publicity, and high-interest rates can wipe out your positions, leaving you in a hole. So before making that move, you need to understand some of the risks of trading stocks and be ready for any eventuality. Keep reading to learn more.
- Commodity Price Risk
Drastic price changes in commodities can affect a business’s bottom line negatively or positively. For instance, if the price of aluminium ore increases, car manufacturers’ production costs will increase, reducing their profits. Furthermore, in some cases, they might be forced to push the additional costs to consumers, negatively affecting their demand. If you’re invested in vehicle manufacturing stocks at such a period, you’re most likely to see a drop in earnings.
- Negative Headlines
In today’s social media-connected world, news travels fast, especially when it’s bad news. Negative headlines about a company you have investment interests in or the sector, in general, can hurt your position. For instance, when the Fukushima incident happened, all nuclear power generating plants in the energy sector faced backlash. Furthermore, the news was so negative that the German public demanded the phasing out of nuclear plants in the country.
- Obsolescence
New inventions and the constant development of current technology is a good thing. However, it also has the unintended or, in some instances, intended consequence of deeming the previous technology obsolete. Furthermore, the current rapid rate of development is rendering a lot of previously cutting-edge technology outdated faster than in any other period. So when investing in the next great new thing, keep in mind it might be for a short while.
- Legislation
The relationship between government and businesses has long been friend and foe or Disney’s Tom and Jerry. It can be friendly and cordial one day or knocking down your door with a warrant in hand the next. Furthermore, if the current legislative conditions do not align with the sector you’re invested in, it can drastically affect your outcomes. For instance, current legislation prioritises the environment, and old investment pillars like oil are already showing signs of cracking.
- Inflation/ Interest Rates
Inflation affects production costs, while interest rates affect companies’ borrowing ability to offset them. Furthermore, highly leveraged companies find it challenging to keep up with their debt obligations and high shareholder returns. So if you invest in a poorly managed or highly leveraged company, you risk losing your investment if inflation hits.
- Time
Have you ever heard of the saying that time heals everything? Well, it can also wipe out any gains made on stocks. It’s human nature to want to keep a good thing going, but everything has a start and an end. The trick is to know when to enter and exit a position. If you wait long enough, the wheels of time will keep spinning, and you don’t want to land on the wrong side.
- Opportunity Cost
This is not a risk like the others that something will happen and affect your position, but we feel it’s still worth mentioning. When you say yes to something, you’re inadvertently saying no to something else. So when you choose a stock option, you’re taking a gamble, hoping it performs well and risk leaving better ones on the table.
Closing Thoughts
Everything in life is a risk; even not doing anything is still one. Furthermore, we can sit here and tell you how challenging everything is, but we will not do that. Instead, we would like to appreciate human tenacity and the fact that even with odds stacked against us, we still find a way to rise to the occasion. So does investing in stock come with risks? Most definitely. But will you let that stop you? We don’t think so.