Absolutely no one can predict exactly how a stock will perform in the future. There is no guarantee that stock values will go up, or that a company will pay dividends. There’s not even a guarantee that a company will stay in business long enough for you to see a return.
Risks That Affect EVERY Stock
When you invest in stocks, their values can change often and for many reasons. That said, these are three risks that every stock faces, regardless of its industry or sector.
1. Headline Risk
Headline risk is the risk that stories in the media will hurt a company’s business. One bit of bad news can lead to a market backlash against a specific company or an entire industry.
2. Legislative Risk
Legislative risk refers to the risk that government actions will place constraints on a corporation or industry, thereby adversely affecting an investor’s holdings in that company.
3. Obsolescence Risk
Obsolescence risk is the risk that a company’s business is “going the way of the dinosaur.” Very few businesses last to celebrate a 100 year anniversary. And those who have lasted a century, have not done so by keeping to the same business processes they began with.
Risks At This Moment
Wall Street is likely the riskiest it has been in decades. Closing in on a decade-long run, the U.S. stock market’s Bull cycle is old. By traditional measures it is overvalued. Analysts believe this could be a recipe for extremely volatile trading and a risky investing environment ahead. In fact, stocks are primed for a pullback. The same analysts believe a 5 to 10 percent decline is certainly possible over the next couple of quarters.
Aside from the usual risks associated with investing in stocks, there are unusual risks lurking in the shadows of the stock market. These unusual risks include: missteps by China as it makes efforts to deal with its bad-debt problem, and challenges facing the U.K. government as it negotiates its exit from the European Union. Both of which are great examples of the Legislative risk mentioned above.
It is always risky to invest in the stock market. This is especially true if your not certain how the stock market works, what makes a stock’s price rise or fall, or how your stock portfolio is expected to perform. In all the market’s uncertainty, there is one thing you can be sure of: There is no such thing as a risk-free stock.