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Company Risks

There are two common risks on the company-wide level. The first, financial risk, is the danger that a corporation will not be able to repay its debts. This has a great effect on its bonds, which finance the company's assets.

The more assets financed by debts (i.e., bonds and money market instruments), the greater the risk. Studying financial risk involves looking at a company's management, its leadership style, and its credit history.

Management risk is the risk that a company's management may run the company so poorly that it is unable to grow in value or pay dividends to its shareholders. This greatly affects the value of its stock and the attractiveness of all the securities it issues to investors.

Market Risks

Fluctuation in the market as a whole may be caused by the following risks. Market risk is the chance that the entire market will decline, thus affecting the prices and values of securities. Market risk, in turn, is influenced by outside factors such as embargoes and interest rate changes.

Liquidity risk is the risk that an investment, when converted to cash, will experience loss in its value.

Interest rate risk is the risk that interest rates will rise, resulting in a current investment's loss of value. A bondholder, for example, may hold a bond earning 6% interest and then rates on that type of bond climb to 7%.

Inflation risk is the danger that the dollars one invests will buy less in the future because prices of consumer goods rise. When the rate of inflation rises, investments have less purchasing power. This is especially true with investments that earn fixed rates of return. As long as they are held at constant rates, they are threatened by inflation. Inflation risk is tied to interest rate risk, because interest rates often rise to compensate for inflation.

Exchange rate risk is the chance that a nation's currency will lose value when exchanged for foreign currencies.

Reinvestment risk is the danger that reinvested money will fetch returns lower than those earned before reinvestment. Individuals with dividend-reinvestment plans are a group subject to this risk. Bondholders are another.

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* Contributed by: -
Prof. M. Guruprasad is Senior Faculty for Economics, Finance and Research, with AICAR Business School Raigad / Mumbai. He has more than 15 years of experience in research and educating / training management students. He was research scholar with the University of Mumbai. Worked as Executive in the Marketing research industry. Also Conducted Workshops and Training programmes. He has published articles in various industry magazines, newspapers and has initiated many discussions on academics.