What is global risk?
The overall risk is the possibility that a report negatively affects the share price. Overall risk can also affect the performance of a specific sector or the stock market as a whole. For example, the announcement of a trade war between the United States and China created an overall risk for the broader financial markets in 2020-2019.
Understanding the overall risk
Title risk is the risk that a title or a news story could influence the price of a stock, sector or broader market. Suppose a pharmaceutical company releases a new drug called “Cholestride” that significantly lowers a person’s cholesterol level. In response to the drug, a competitor is organizing a study that finds a possible but inconclusive link between the new cholesterol drug and liver damage. This creates an overall risk for the manufacturers of Cholestride which must be managed to prevent it from having a significant impact on the company’s share price. (See also: 10 risks each action faces.)
Newspaper, television and online headlines – including social media posts such as Twitter – can affect share prices. Note that prices may change, even if the story is incorrect or misleading, although in such cases prices will tend to fall. Headlines can also create positive movements, such as an FDA approval of a new drug or another breakthrough.
The overall risk can be mitigated through effective public relations (PR) campaigns. Successful public relations efforts can promote positive images of a business that can help counter negative stories and quickly control damage if such a story is published. (For more information, see: 6 tips for running a public relations nightmare.)
Key points to remember
- The overall risk is that a news article will negatively affect the price of a stock, the timing and content of the article being unknown in advance.
- Overall risk most often affects individual companies, but can also weigh on sectors or on the whole market.
- Overall risk can be mitigated by public relations (PR) campaigns and a long-term investor strategy that ignores the short-term fluctuations triggered by headlines.
Managing overall risk
Individual investors can counter overall risk by using a buy and hold investment strategy that ignores short-term market changes that are triggered by the securities. For example, instead of focusing on daily fluctuations in stock prices, investors should assess the performance of their portfolios at the end of each quarter and make the necessary changes accordingly.
A 24-hour news cycle means that investors are continuously exposed to headlines that can have a negative impact on their investments. Instead of reading every financial news, investors should focus on a few credible news sources that provide reliable information or do their own research. There is a plethora of free information online for investors to learn the basics of financial and technical analysis. (For more information, see: The basics of a financial analysis report.)
Example of overall sector risk
Following the subprime mortgage crisis of 2007-2020, mortgage lenders such as Bank of America, JPMorgan Chase & Co. and Citigroup faced significant overall risk from the collapse of other financial institutions or d ‘severe financial pressure.
After the collapse of Lehman Brothers and the bailout of leading financial institutions, including Fannie Mae and Freddie Mac in 2008, investors had little confidence in the stability of the financial system, and any negative headline about the financial sector could trigger a action liquidation of financial actions. (See also: The Lehman Brothers collapse: a case study.)