Different Types of Risks

One of the key focuses of TeenInvest.com is to educate young people on effective investment strategies that can help them lower risks in the stock market. So with this being said, lets start on how to lower the risks.

 Rules for Individuals.

– Rule 1: Don’t let debt grow faster than credit( always pay your loans)

• Otherwise you will go bankrupt

– Rule 2: Don’t let income rise faster than productivity 

• Otherwise you will become uncompetitive

– Rule 3: Do everything you can to continuously raise your productivity

Risk according to Warren Buffett who says there are 3 types of business risk

(Never buy stocks like these)

1. Capital structure– 

ex. businesses with lot of debt

2. Capital requirements–

ex. businesses which require lots of money to create their products, such as car manufacturing, oil production, … 

3. Commodity products– 

ex. generic soda vs. Coca-Cola ==> they both sell carbonated sugar water.  Which one has a competitive advantage?

Systematic risk vs Idiosyncratic risk

1. idiosyncratic– The possibility that the price of an asset can rise or decline due to an event that specifically affects the asset but not the market as a whole.

– Example: a company suffers a plant closure due to a broken machine, its stock price can be affected while the rest of the market is not.

– Example: the CEO has a heart attack

2. systematic– common risks effecting the entire market

– they can not be diversified away

– Example: global warming, the great recession, World War II