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Risks

Legislative Risk

Legislative risk refers to the tentative relationship between government and business. Specifically, it’s the risk that government actions will constrain a corporation or industry, thereby adversely affecting an investor’s holdings in that company or industry. The actual risk can be realized in a number of ways—an antitrust suit, new regulations or standards, specific taxes and so on. The legislative risk varies in degree according to industry, but every industry has some.

In theory, the government acts as cartilage to keep the interests of businesses and the public from grinding on each other. The government steps in when business is endangering the public and seems unwilling to regulate itself. In practice, the government tends to over-legislate. Legislation increases the public image of the importance of the government, as well as providing the individual congressmen with publicity. These powerful incentives lead to a lot more legislative risk than is truly necessary.

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Risks

Detection Risk

Detection risk is the risk that the auditor, compliance program, regulator or other authority will fail to find the bodies buried in the backyard until it is too late. Whether it’s the company’s management skimming money out of the company, improperly stated earnings, or any other type of financial shenanigans, the market reckoning will come when the news surfaces.

With detection risk, the damage to the company’s reputation may be difficult to repair; and it’s even possible that the company will never recover if the financial fraud was widespread (Enron, Bre-X Minerals, ZZZZ Best, Crazy Eddie’s, and so on).

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Risks

Obsolescence Risk

Obsolescence risk is the risk that a company’s business is going the way of the dinosaur. Very, very few businesses live to be 100, and none of those reach that ripe age by keeping to the same business processes they started with. The biggest obsolescence risk is that someone may find a way to make a similar product at a cheaper price.

With global competition becoming increasingly technology savvy and the knowledge gap shrinking, obsolescence risk will likely increase over time.

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Risks

Rating Risk

Rating risk occurs whenever a business is given a number to either achieve or maintain. Every business has a very important number as far as its credit rating goes. The credit rating directly affects the price a business will pay for financing. However, publicly traded companies have another number that matters as much as, if not more than, the credit rating. That number is the analyst’s rating.

Any changes to the analysts rating on a stock seem to have an outsized psychological impact on the market. These shifts in ratings, whether negative or positive, often cause swings far larger than is justified by the events that led the analysts to adjust their ratings.

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Risks

Headline Risk

Headline risk is the risk that stories in the media will hurt a company’s business. With the endless torrent of news washing over the world, no company is safe from headline risk. For example, news of the Fukushima nuclear crisis in 2011 punished stocks with any related business, from uranium miners to U.S. utilities with nuclear power in their grid.

One bit of bad news can lead to a market backlash against a specific company or an entire sector, often both. Larger-scale bad news—such as the debt crisis in some eurozone nations in 2010 and 2011—can punish entire economies, let alone stocks, and have a palpable effect on the global economy.

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Risks

Commodity Price Risk

Commodity price risk is simply the risk of a swing in commodity prices affecting the business. Companies that sell commodities benefit when prices go up, but suffer when they drop. Companies that use commodities as inputs see the opposite effect. However, even companies that have nothing to do with commodities, face commodities risk.

As commodity prices climb, consumers tend to rein in spending, and this affects the whole economy, including the service economy.

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What is Trading ?

Trading vs investing: What’s the difference?

The difference between trading and investing lies in the means of making a profit and whether you take ownership of the asset. Traders attempt to profit from buying low and selling high (going long) or selling high and buying low (going short), usually over the short or medium term.

Investors will also attempt to profit Investors will also attempt to profit from buying shares at a low price and selling high, but over a longer term. They may also aim to earn income in the form of a dividend.

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What is Trading ?

Who trades?

In financial markets, millions of companies, individuals, institutions and even governments are all trading at the same time. But what is a trader? A trader is defined as a person who buys and sells financial instruments with the aim of making a profit.

Some traders stick to a particular instrument or asset class, while others have more diverse portfolios. Some do lots of research before placing a trade, while others read charts and watch out for trends.

But trades all have one thing in common – they all carry risk. Risk is a key concept to all types of financial trading. No matter what instrument is being traded, who’s trading it or where the trade takes place, balancing potential profit against risk is key to a successful trading strategy.

No matter what instrument is being traded, who’s trading it or where the trade takes place, balancing potential profit against risk is key to a successful trading strategy.

Further, you need to do a comprehensive analysis of the market you want to trade. There are two types of analysis:

Fundamental analysis

 is concerned with all the factors of a company that could have an impact on the stock price of the company in the future. These include financial statements, management processes, and more. The fundamental value of the firm to spot whether the stock is reasonably priced or not is the main objective.

Technical analysis

 focuses on the study of financial charts – and using indicators and other tools to identify possible future trends.

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What is Trading ?

Who is trader ?

A trader is a person who gets involved in buying and selling of a financial asset in any financial market. He or she can buy or sell either for himself/herself or on behalf of another individual or institution. The main difference between an investor and a trader is the duration for which he or she holds on to the asset.

A trader is a person who engages in the short-term purchasing and selling of an equity either for an institution or for themselves. The disadvantages of trading include – capital gains taxes which is applicable to trades and the expenses of paying brokers in the form of multiple commission rates.

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What is Trading ?

What Is Trade?

Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. Trade can take place within an economy between producers and consumers. International trade allows countries to expand markets for both goods and services that otherwise may not have been available.

It is the reason why an American consumer can pick between a Japanese, German, or American car. As a result of international trade, the market contains greater competition and therefore, more competitive prices, which brings a cheaper product home to the consumer.

In financial markets, trading refers to the buying and selling of securities, such as the purchase of stock on the floor of the New York Stock Exchange (NYSE).

KEY TAKEAWAYS

  • Trade broadly refers to the exchange of goods and services, most often in return for money.
  • Trade may take place within a country, or between trading nations. For international trade, the theory of comparative advantage predicts that trade is beneficial to all parties, although critics argue that in reality, it leads to stratification among countries.
  • Economists advocate for free trade between nations, but protectionism such as tariffs may present themselves due to political motives, for instance with “trade wars.”