At the high level, risks can be classified into financial
and non-financial risks.
i.
Financial risks include Market Risk, Credit Risk,
Liquidity Risk
ii.
Non-financial risks include Operational, Legal,
Political etc. risks
Identifying and understanding these risks in detail gives us
plenty of opportunities to trade. It is illustrated here with an example.
Market Risk is associated with interest rates, currency
exchange rates, commodity prices etc. Every business firm is exposed to such
risks. Coal India is the biggest consumer of crude oil and the variation in crude
prices will impact the margin structure of Coal India, so the stock price has a
negative co-relation to oil prices. But neither Coal India’s stock price nor
Brent crude pricing can go in one direction for long. They reverse, find equilibrium
but not for long. Disturbance in market forces set them apart but again there
will be a reversal at some point of time. This information gives the trader an
edge to create trading positions in both and use technical parameters like convergence,
divergence to book profits and wait for another opportunity to initiate trade.
Remember there are other risks playing out during the same time,
which can alter the identified relationship, so the trader need to be cautious and have
watchful eye to identify what is driving the individual stock or commodity
price.
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