It doesn’t matter what the business is, every stock faces some universal risks. It is important for businesses to control these risks and try to minimize them as much as possible.
Explained below are four common risks that businesses generally are prone to:
The Prices of the Commodity
The biggest risk associated with the commodity that the company sells is the risk of a fall in its market prices. On one side, a rise in prices is good for companies, as it allows them to make more profit (depending on several things). However, a fall is not beneficial as it results in lower revenue.
Commodity prices are rarely frozen. They keep on going up and down, based on several things such as, raw material prices, demand and supply, people’s taste, and weather. Companies try to keep prices stable and stop them from dwindling much, especially on a lower side. However, quite often it is not in the company’s hand.
Things that may affect the price of commodity:
- Expensive Raw Material
- Lack of Demand
If the raw material becomes expensive, the commodity will rise in prices, which results in a fall in demand, as both prices and demand are inversely proportional. A fall in demand often results in a fall in revenue, which means that the business will face a drawback.
In addition, there are always attacks from competitors, such as higher promotion or low prices. Businesses have to meet the standard set by the competitors, which often is not very easy.
News that affects a company’s image directly hits its stock. A very good example of such an impact was witnessed in 2011 when news of the Fukushima nuclear crisis came out. It punished stocks with any related business.
Any negative news may affect the company’s stock in a very negative way. This is why businesses keep an eye on what is being written or said about them in the media. The 2010 and 2011 debt crisis in some Eurozone nations is a good example of a frenzy created by the media.
The risk related to the business and government is called legislative risk. Government policies and changing regulations may impact a business in a very negative way. Businesses anticipate budgets with bated breaths to see the change that the budget can bring to the business. Certain things, such as higher standards or taxes may be very harmful for a business.
In the past many businesses had to shut down due to the changing laws and regulations. Since it is something that is not under the business’ control, businesses are required to always be on their toes.
Most businesses run on credit and loans. Huge investments are made after taking loans from financial institutions, on which businesses have to pay back interest. Businesses always run the risk of the interest rates going higher, which would make borrowing expensive and might deter their chances of making a profitable investment.
In the same way, businesses that involve giving out loans are scared of the interest rates falling too low. This has a negative impact on their earnings, as they receive less commission or interest when the rates fall.