No Free Lunch: STOCKS

Bears vs Bulls

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Stocks

Valuation risk:  Valuation risk can apply to purchasers of all assets and means simply that, by overpaying for an asset, the investor will earn an inadequate return – or even incur a loss – over their holding period.  Valuation risk can be a key risk for equity investors, which is one reason Morningstar’s equity analysts focus heavily on determining companies’ fair values.

Fundamental risk:  This refers to the risk that companies’ business fundamentals – their revenues and profitability, for example – could fall short of investor expectations, thereby knocking down the value of their stocks.

Economic risk:  This is the risk that the economy at large could turn down, affecting business fundamentals across industries and companies.  Companies that operate in economically sensitive businesses – manufacturing, basic materials, and energy firms, for example – tend to be particularly sensitive to the strength and direction of the economy.  On the flip side – companies that sell products that people need no matter what, such as makers of toothpaste and pharmaceuticals, tend to be less sensitive to the strength of the overall economy. 

Liquidity risk:  This risk can apply to many asset types. Not just stocks.  In general, it means that there’s no ready market for a given asset, so an investor may not be able to unload the security when she wants – or at the price she would like to fetch it.  Liquidity tends to be a particularly big issue for very-small-company stocks, but it can also apply to some bond types.

Foreign stocks

Currency risk:  As with foreign bonds, this is the risk that currency losses will reduce any gains, or magnify any losses, associated with the underlying investments.  While foreign currency fluctuations can have a meaningful impact on the returns that the US investors earn by investing in foreign bonds, currency fluctuations generally play a smaller, but still significant, role in foreign stock returns.

Geopolitical risk:  Geopolitical risk can take a toll on foreign equities, just as it can with bonds, as the investors will tend to jettison the securities from a country where there’s military action or economic or political unrest. 

Commodities

Economic risk:  Commodities-tracking investments are often put forth as good hedges against inflation because commodities prices are often rising just as consumers are having to pay higher prices for goods.  The flip side is also true, however:  When economic growth and consumption are slow, commodities prices often flag.

Contango:  Because most commodities-tracking investments use derivatives rather than investing directly in – and taking possession of – commodities, there’s the risk that the price of the futures contracts won’t directly match the spot prices of the actual commodities.  In case of “contango,” the price of the futures contracts for a given commodity are higher than the spot price.                                                                                                                                                                                         #STOCKS #INVESTMENTS #RISK #FINANCES #EQUITIES #FINANCES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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