Stock Market Investing for Beginners: A Beginners Guide to the Stock Market. How to make money in stocks. by Gianmarco Venturisi

Author:Gianmarco Venturisi [Venturisi, Gianmarco]
Language: eng
Format: azw3
Published: 2020-09-28T00:00:00+00:00

1.4.2THE RISK ASSESSMENT

It is possible to include the riskiness of a share security within the context of the fundamental analysis, since in order to determine the riskiness itself, first of all, analysis tools related to the analysis of the financial statements, the corporate structure and other elements are adopted. which are based on the "structural" elements of the company issuing the share.

We have already shared the notion of risk intended as the probability of negative price swing. However, there are several "versions" for this type of risk. Without wanting to go into technicalities, it is possible to distinguish two main types of "triggers", of triggers for the activation of negative risk variations. Generally, the "market risk" and the "credit risk".

Market risk is the risk associated with negative price changes determined by the economy of the specific market (understood both as a geographical area and as a sector) to which the share is connected.

Let's take an example: the FIAT stock is clearly connected to the car stock market. If the car market collapses, the probability that the FIAT stock will also collapse is very high. Market risk can be measured with different instruments; in general, statistical tools are used to determine the measurement (e.g. standard deviation, VaR, C-VaR, etc ...)

Credit risk is the risk of loss of value of a security deriving from the possibility that the company goes into default, or that it goes bankrupt, not honoring its debts. Credit risk is a specific risk for each type of company, although it is still possible to identify elements of correlation between the credit risks of similar companies operating in the same geographical area.

It is possible to measure, also in this case, credit risk by means of statistical indicators (e.g. Expected Shortfall).

It is clear that the securities subject to credit risk are "bond" securities, or "loan" securities issued by companies. It is equally evident that, in the event that a company issuing bonds does not honor its debts, this will result in an immediate reduction in the share value. Who would want to own shares in a company unable to honor their debts?

Statistical risk indicators are particularly complex to calculate and monitor. To overcome the complexity of the calculation, on the one hand, once again, specialized companies of financial analysts have been able to calculate these indicators "daily", on the other synthetic indicators of risk have been defined , in particular as regards the so-called credit risk, by the so-called Rating Companies.

The latter periodically screen listed companies, assigning a reference value (the so-called rating) which, briefly, identifies the level of risk of "default" associated with the issuing companies.

It should be noted that, since the ratings are produced periodically and not on a daily basis, they tend to be less "reactive" than other statistical indicators (indicators based on the statistical calculation based on time series or sampling methodologies, on a daily basis).

The most famous rating companies are S&P, Moody's and Fitch. Below is a summary indication of the ratings, shown schematically:

RATING

Risk assessment

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