What are the risk factors to consider with share investing?
Size of company
Big companies tend to be less risky than small companies. This is because they usually have a more diverse earnings base. If one part underperforms it can be compensated for by better-performing parts.
Proportion of fixed costs
Companies with high fixed costs, like big factories, are unable to respond quickly when their revenues turn down. Mining companies are a good example. Even if they take the drastic step of mothballing a mine, there are still ongoing costs.
Amount of borrowing
Companies that have a lot of debt on their balance sheets tend to be riskier than companies with less. That is because debt repayments must be made no matter what the state of the economy.
Liquidity of the share in the market
If there is very little liquidity in a share, usually because it’s very small, then it can sometimes take time to sell a stake, or you have to take a big discount to do so.