Stock market investing involves a whole lot of risk, that could be domestic, international or purely company related risks. Here are 8 risks that impact stock markets and drag them lower.
1) Regulatory risk
This is the biggest risk that faces individual companies.
2) Company related risks
Siphoning off of money, frauds etc., are risks that have been witnessed in the past. Classic example, is the case involving the erstwhile Satyam Computers.
This is also a big risk and generally, share prices fail to recover, after this as there is lack of faith in the management of companies.
3) Currency risk
Several companies that cater to the international markets face these risks. A sharp currency movement takes a toll on both export oriented and import companies. These include companies like pharma and IT, along with importers of crude, to name just a few.
4) Industry related risks
This is again another risk, that could affect the financial performance of a company. For example, if there is a slump in demand for the products it could lead to weaker sales and affect growth of a company.
5) Technology risks
Technology risks could also lead to change in the performance of a company, which could lead to a disastrous performance of a stock in the markets. For example, the advent of digital camera, hit companies that were making film rolls badly.
Manufacturers of watches, calculators, digital dairies were all hit by the emergence of mobile phones.
6) External risk
This is another big risk, given that the world has become a single market. For example, a Chinese devaluation tends to hit stocks across the globe. Apart from this the monetary policy stance of many companies also tends to have an impact on the performance of companies.
7) Liquidity risks
Higher amount of liquidity across the globe tends to drive stock prices higher. For example, when there are easy monetary conditions, there is more liquidity, which pushes stock prices higher. On the other hand, when there is less liquidity it tends to drag stocks lower.
8) Economic data risks
Economic data also plays an important role on how stock markets move. For example, poor GDP data, could lead to drop in stock prices. On the other hand higher inflation may lead to an increase in interest rates, which is not good for the stock markets.